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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Commission File Number: 000-25081
Vail Banks, Inc.
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(Exact name of registrant as specified in its charter)
Colorado 84-1250561
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
108 South Frontage Road West, Vail, Colorado 81657
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (970) 476-2002
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Securities registered pursuant to Section 12(b) of the Act: None
Name of exchange on which registered:
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $1.00
par value per share.
Check whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [ ] No [X]
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.
State issuer's revenues for its most recent fiscal year. $28,184,000
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Transitional Small Business Disclosure format. Yes [ ] No [X]
State the aggregate market value of the voting stock held by non-affiliates
(which for purposes hereof are all holders other than executive officers and
directors): As of March 8, 2000: 6,081,180 shares of common stock $1.00 par
value (the "Common Stock"), were issued and outstanding with an aggregate value
of $37,242,041 held by non-affiliates (based on market value of $9.28/share)
(computed by reference to the average bid and asked price of the Common Stock on
March 8, 2000)
State the number of shares outstanding of each of the issuer's classes of
Common Stock as of the latest practicable date: As of March 8, 2000, there were
issued and outstanding 6,081,186 shares of Common Stock.
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PART I
ITEM 1. BUSINESS.
GENERAL
Vail Banks, Inc. ("Vail Banks") is a bank holding company headquartered in
Vail, Colorado with consolidated assets of $465 million at December 31, 1999.
Vail Banks' wholly owned subsidiary, WestStar Bank ("WestStar"), is a Colorado
state bank with 25 retail offices located primarily in the western slope region
of Colorado. On July 31, 1998, Vail Banks merged with Independent Bankshares,
Inc. ("Independent") and WestStar merged with Glenwood Independent Bank
("Glenwood"), expanding its presence into Garfield County, Colorado. In
connection with the merger, Vail Banks issued 318,770 shares of its Common Stock
and paid $3.8 million in cash to holders of Independent common stock. On
December 15, 1998, Vail Banks merged with Telluride Bancorp, Ltd. ("Telluride")
and WestStar acquired the capital stock of Telluride's former subsidiaries, Bank
of Telluride and Western Colorado Bank (both recently merged into WestStar),
expanding its presence into Ouray, San Miguel and Montrose Counties, Colorado.
Vail Banks issued 908,913 shares of Common Stock and paid $13.3 million in cash
to the holders of Telluride common stock.
In July 1999, the Division of Banking of the State of Colorado ("CDB") and
the Federal Reserve Bank of Kansas City approved the application for the mergers
of WestStar and Vail Banks' other subsidiary banks, Western Colorado Bank and
Bank of Telluride. The mergers closed August 6, 1999, with WestStar as the
surviving entity. The mergers were accounted for under the purchase method of
accounting.
In May 1999, Vail Banks acquired $36.8 million of deposits and the branch
office of the Glenwood Springs, Colorado branch of World Savings of Oakland,
California. World Savings retained its mortgage loans. The acquisition makes
WestStar one of the largest depository institutions in the Glenwood Springs
market. Additionally, on November 8, 1999, WestStar entered into an agreement to
acquire First Western Mortgage Services, Inc., a Colorado corporation ("First
Western"), for consideration that included cash, Vail Banks Common Stock, and
installment notes. The acquisition closed on January 1, 2000, and added mortgage
brokerage to WestStar's lending services. First Western continues to operate as
a wholly-owned subsidiary of WestStar.
WestStar was formed in 1977 as a community bank to serve the local
residents and businesses of Vail. In 1993, Vail Banks was formed as a bank
holding company for WestStar. Vail Banks has maintained WestStar's position as
an institution offering a relatively broad range of convenient banking services,
delivered with personalized customer service. WestStar currently has offices in
the region of Colorado locally referred to as the "Western Slope," including
Summit County (which includes the Breckenridge and Keystone ski resorts), Eagle
County (which includes the Vail and Beaver Creek ski resorts), Delta County,
Garfield County (which serves the Aspen and Snowmass ski resorts), Montrose
County, Ouray County, San Miguel County (which includes the town and ski resort
of Telluride), Routt County (which includes the town and ski resort of Steamboat
Springs) and offices in Denver. These areas of Colorado are home to a variety of
commercial, recreational, entertainment, and cultural enterprises.
The Western Slope has experienced significant growth in recent years,
primarily as a result of an expanding market for first and second homes, and
summer and winter tourism. As the year-round population of this region has
grown, local businesses have prospered by servicing this growth. Consequently, a
large concentration of Vail Banks' business is in construction lending and
providing banking services for small-to-medium size businesses in its markets.
The acquisition of Western Colorado Bank, which was located in a more rural area
and thus less dependent on customers involved in the tourism industry than
WestStar, has diversified the economic base in which Vail Banks operates. To
meet the growing needs of its customers and to prepare for future growth
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throughout the Western Slope, Vail Banks has developed a stronger infrastructure
by (1) expanding its computer technology, (2) entering emerging growth markets
by building and staffing new facilities, and (3) centralizing certain
administrative, processing, accounting and other operations functions. Although
this investment in infrastructure has adversely affected net income since 1994,
management believes that the desired infrastructure is now substantially in
place to absorb growth in existing markets and to allow for the efficient
integration of retail offices in new markets. Management also believes that some
of these capital and one-time expenses will be reduced in the future.
Vail Banks' growth has been designed to maintain customer loyalty through
continuity of operations and personnel. Historically, shareholders of entities
merged into Vail Banks, who are typically members of the local community, elect
to hold ownership stakes in Vail Banks after the merger. Also, local executives
and employees of banks and branches merged into Vail Banks are generally
interested in and encouraged to continue their employment with Vail Banks. The
additions of Bank of Telluride (founded in 1969), Western Colorado Bank (founded
in 1950) and Glenwood (founded in 1955) expanded Vail Banks' presence in Western
Slope markets, as these were well-established community banks that had
significant local sponsorship. Several directors of WestStar, as well as its
chief executive officer, have been associated with WestStar for more than ten
years. The director of Independent and one of the two directors of Telluride who
joined the Board of Vail Banks have also been associated with those banks for
more than ten years. James Brenner, who has been with First Western for over 25
years, is continuing to manage the mortgage business as a part of WestStar.
In this Form 10-KSB, most percentage and dollar amounts have been
rounded to aid presentation; as a result, all such figures are approximations.
References to such approximations have generally been omitted.
GROWTH STRATEGIES
Vail Banks intends to enhance and solidify its position as a major provider
of community banking services for individuals and small-to-medium size
businesses on the Western Slope. As a result of its significant investment in
retail offices, technology and administration infrastructure, management
believes that Vail Banks' growth, both internally and by merger or acquisition,
can be quickly and efficiently integrated.
Vail Banks believes that it will continue to grow through expansion of its
existing market share, de novo establishment of retail offices, and mergers and
acquisitions. Vail Banks' loan portfolio increased from $78.7 million to $336.7
million from December 31, 1995 to December 31, 1999, for a compound annual
growth rate of 44%. During the same period, Vail Banks opened six de novo
branches. Additionally, the First Western acquisition represents the sixth
acquisition completed by Vail Banks since January 1, 1997.
EXPANSION OF MARKET SHARE. Vail Banks intends to continue to increase its
overall market share in its markets by solidifying relationships with current
customers and attracting new customers who desire a local banking relationship.
Management believes that this can be accomplished by (1) evaluating the needs of
its existing and potential customers to determine ways to enhance services and
products, (2) continuing a focus on training and motivating its associates, (3)
providing personalized customer service, and (4) further implementing
technological advances to make banking more efficient and convenient.
DE NOVO ESTABLISHMENT OF RETAIL OFFICES. Vail Banks intends to continue to
expand by opening new retail offices. Management believes that initially
establishing a small presence in a growing community positions Vail Banks to
expand with the community, thereby fostering a local identity with existing
businesses and consumers in the community as well as offering new customers an
alternative to impersonal, institutional banks.
MERGERS AND ACQUISITIONS. Vail Banks' merger and acquisition strategy is to
increase its market share in its existing markets and to enter attractive new
markets by merging with well established community banks. In assessing potential
mergers, Vail Banks focuses on credit quality, financial performance, market
share,
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management, location, community demographics, strength of the local economy,
potential merger synergies and the terms of the transaction. Management believes
that there are a number of community banks that meet Vail Banks' criteria and
whose owners may be interested in merging their banks with a community-based
organization like Vail Banks. Additionally, management believes that merging
with established banks and then methodically integrating their operations into
Vail Banks allows Vail Banks to offer its relatively broad range of products and
services while maintaining the merged bank's reputation and community ties. Vail
Banks' strategy is to streamline operations judiciously, in order to optimize
the balance between cost savings and not interrupting the community-based
services of the acquired bank.
COMMUNITY BANKING PHILOSOPHY
WestStar is a community bank that provides a relatively broad range of
banking products and services to consumers and businesses in all of its retail
offices. Retail offices are operated with the goal of offering individualized
customer service and providing superior financial services. Many administrative
operations, such as data processing, loan administration, account reconciliation
and maintenance, accounting, compliance and broad policy decisions are
centralized in order to ensure consistency, accuracy and efficiency and to allow
retail office personnel to concentrate on providing superior customer service.
The managers and associates of each retail office focus on day-to-day customer
service, business development and selling. Management of Vail Banks believes
that this organizational structure allows retail offices to offer the
individualized customer service of a community bank while maximizing the
benefits of technological expertise, operating synergies and other cost saving
administrative efficiencies.
Management is committed to investing in its communities. Executive officers
and market managers live in the communities served by their retail offices, and
Vail Banks encourages board members and bank associates to be actively involved
in civic and public service activities in their communities. Additionally, most
charitable contribution decisions are made by WestStar's market managers.
HISTORY
In December 1993, Vail Banks commenced operations by acquiring 100% of the
outstanding shares of WestStar, which opened in December 1977. Since that time,
Vail Banks has grown through a combination of internal growth, de novo
establishment of retail offices and external growth, including the acquisition
of community banks. In 1994, WestStar converted from a national bank to a state
bank. In January 1994, WestStar opened a retail office in Avon to begin serving
that growing community located west of Vail. In June 1995, Vail Banks acquired
Snow Bancorp, a bank holding company located in Dillon, and merged its bank
subsidiary into WestStar. In 1996, taking advantage of changes to Colorado bank
branching laws that permitted subsidiary banks of Colorado bank holding
companies to branch into additional locations, WestStar opened retail offices in
Frisco and Edwards. In 1997, Vail Banks merged with Cedaredge Financial
Services, Inc. ("Cedaredge"), a bank holding company with retail offices in
Basalt, Cedaredge, Delta and Montrose that were converted to WestStar retail
offices. WestStar's Gypsum, Breckenridge and Eagle retail offices were opened in
1997. The acquisition of Independent added retail offices in Glenwood Springs
and New Castle; and the acquisition of Telluride added retail offices in
Telluride, Norwood and Montrose. The acquisition of World Savings added another
office in Glenwood Springs, and the acquisition of First Western in early 2000
added offices in Eagle-Vail and Steamboat Springs.
SERVICES AND PRODUCTS
Vail Banks serves the banking needs of its business and consumer customers
by providing a relatively broad range of commercial and consumer banking
products and services in all of its communities. These products and services
include short-term and medium-term loans, revolving credit facilities, inventory
and accounts receivable financing, equipment financing, short-term commercial
mortgage lending and mortgage brokerage, installment
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loans, home improvement loans, short-term loans for the purchase or refinancing
of principal residences or second homes, personal banking through computer and
telephone access, safe deposit box services and various savings accounts, money
market accounts, time certificates of deposit and checking accounts, automated
teller machines, depository services, and corporate cash management services.
LENDING. Vail Banks offers loans for business and consumer purposes and
focuses its lending activities on individuals and small-to-medium size
businesses. Lending activities are funded primarily from core deposits gathered
in the local communities. Loan products are concentrated in relatively
short-term, variable rate loans, with a majority of the loans at December 31,
1999 having remaining terms of less than two years. Collateral for loans is
concentrated in real estate and operating business assets. The mergers with
Independent and Telluride brought an expanded focus on consumer lending. The
acquisition of First Western added an expanded array of residential mortgage
products through its mortgage operations. Vail Banks also participates in many
Small Business Administration ("SBA") programs. It has experienced significant
growth in its SBA lending division since 1995, and in January 1999 the SBA
designated WestStar as one of the top 25 SBA lenders in Colorado during 1998.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Financial Condition" in Item 6.
DEPOSITS. Vail Banks offers a relatively broad range of depository products
including checking, savings and money market accounts, and certificates of
deposit. Deposits are insured by the Federal Deposit Insurance Corporation
("FDIC") up to statutory limits. Within ranges set by policies determined on a
centralized basis, retail office managers have local authority to determine the
type, mix and pricing of the depository products offered to best compete in a
retail office's particular marketplace. Additionally, because some of Vail
Banks' markets are located in resort areas, deposits tend to peak during the ski
season. However, increases in deposits in non-resort markets have reduced the
overall impact of such seasonality.
OTHER SERVICES. WestStar offers its customers the flexibility of monitoring
their loan and deposit account activity and conducting some banking transactions
24 hours a day through personal computers from their home or business.
Additionally, telephone access allows customers to receive current account
balances, deposit status, checks paid, withdrawals made, loan status, loan
amounts due and other specifics relating to services provided by WestStar.
WestStar has 21 automated teller machines, 15 of which are located at retail
offices and six of which are located at remote locations.
ADMINISTRATION OF WESTSTAR
The retail offices operate through a customer driven organization.
Market managers and retail office managers operate with significant customer
service-oriented local autonomy, within criteria established by WestStar, to
provide financial services, make lending decisions, sell products and present a
favorable impression of WestStar to the community in order to attract new
customers. Administrative functions that can be centralized have been placed in
an operations center in Gypsum.
At the operation center, Vail Banks provides administrative services,
oversight and support to the retail offices, including data processing,
accounting services, investments, credit policy formulation, loan
administration, a customer service center, PC banking support and other customer
service assistance.
Management believes that by standardizing products, services and
systems, and providing appropriate holding company support, retail office
personnel can concentrate on customer service and community relations.
Management also believes that continued centralization of services will benefit
the individual retail offices by lowering expenses of administration and data
processing services, streamlining credit administration and supervision, and
facilitating compliance with the requirements of increasingly complex banking
regulations. Ultimately, such standardization and centralization is intended to
contribute to Vail Banks' acquisition strategy by improving the results of
operations of acquired banks and retail offices. Vail Banks believes that
autonomy at
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the retail office level allows its banking subsidiary to better serve customers
in their respective communities, and thus enhances business opportunities and
operations. This structure also has served in the past to ease the integration
of banks acquired by Vail Banks because it allows Vail Banks to maintain
customer familiarity (by maintaining existing management and retail office
culture), while at the same time transitioning new retail offices to Vail Banks'
policies and procedures.
TECHNOLOGY
Vail Banks' use of advanced technology enables it to offer customers fast,
efficient services and connects all of Vail Banks' financial service
representatives with on-line access to information concerning all customer
account data. Additionally, advanced hardware and software has been installed
that allows images (or photographs) to be taken of all items (checks, deposit
tickets and payments). Once processed, the images of checks and deposit tickets
are simultaneously associated with the appropriate customer's account, where
they are stored and retrieved to be printed with customer statements. The
imaging system also will allow, via a data network, instant access at all retail
offices to loan files, customer signature cards and other data that is available
currently only at the originating retail office. Vail Banks believes that its
technology platform is among the most advanced for banks of Vail Banks' size in
Colorado and provides Vail Banks with the resources to continue to offer
leading-edge services to customers. Vail Banks believes the integrity of client
information is well protected by its data security system and its off-site
disaster back-up storage facilities.
COMPETITION
The banking business is highly competitive, and the profitability of Vail
Banks depends principally upon Vail Banks' ability to compete in its markets.
The financial services industry is currently highly fragmented, but
consolidation in the industry continues to reduce the number of independent
banks. Vail Banks competes with other commercial banks, savings institutions,
credit unions, finance companies, brokerage and investment banking firms,
insurance companies, asset-based lenders and certain other nonfinancial
institutions, including retail stores that offer credit programs and
governmental organizations which offer financing programs. Many competitors of
Vail Banks have much greater financial resources, greater name recognition and
more offices than Vail Banks. Some of these entities and institutions are not
subject to the same regulatory restrictions as Vail Banks. Vail Banks believes
it has been able to compete effectively with other financial institutions by
emphasizing customer service, technology and local office decision-making, by
establishing long-term customer relationships and building customer loyalty, and
by providing products and services designed to address the specific needs of its
customers.
Congress has enacted legislation allowing full nationwide interstate
banking and branching. Additionally, Colorado law permits interstate branching
(the acquisition of a bank in Colorado by an out-of-state bank without the
requirement of maintaining a Colorado banking charter). These laws may lead to
increased competition from out-of-state banks in Vail Banks' markets. See
"Supervision and Regulation" in this Item 1.
Management believes that WestStar will continue to compete successfully in
its communities. Vail Banks believes its competitive strengths include its
reputation for developing and continuing banking relationships, responsiveness
to customer needs and individualized customer service, and skilled, resourceful
personnel. Management believes that large, institutional banks cannot or are
unwilling to offer a high level of individualized customer service, and that
Vail Banks' customers and potential customers choose to bank with Vail Banks to
take advantage of this attention while also receiving products and services at
competitive prices. The factors affecting competition include banking and
financial services provided, customer service and responsiveness, customer
convenience and office location. Vail Banks further believes that the community
commitment and involvement of its personnel and its commitment to providing
quality financial services are factors that should allow it to continue to
maintain and improve its competitive position.
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Vail Banks also faces competition in acquiring financial institutions.
Colorado has recently experienced a significant consolidation of its banking
industry, and many large holding companies with greater resources than Vail
Banks (including several out-of-state holding companies) are actively pursuing
acquisitions in Colorado. This competition affects the acquisition opportunities
for Vail Banks and can affect the cost of such acquisitions.
ASSOCIATES
As of March 1, 2000 Vail Banks, WestStar and First Western employed
approximately 227 persons, 224 on a full-time basis and 3 on a part-time basis.
Neither Vail Banks nor WestStar is a party to any collective bargaining
agreement, and Vail Banks believes that its employee relations are good.
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SELECTED FINANCIAL DATA
The selected historical data set forth below should be read in
conjunction with "General," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the consolidated financial statements and
notes thereto and other financial data contained elsewhere in this Annual Report
on Form 10-KSB.
(Dollars in thousands, except for share data)
<TABLE>
<CAPTION>
EARNINGS 1999 1998 1997
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<S> <C> <C> <C>
Net interest income $ 24,214 13,574 9,508
Provision for loan losses 455 -- 232
Non-interest income 3,970 2,388 1,273
Non-interest expense 19,832 13,048 9,787
Net income 4,856 1,959 474
Cash earnings (1) 5,840 2,256 607
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PER SHARE DATA
Basic earnings 0.80 0.47 0.23
Basic cash earnings (1) $ 0.97 0.58 0.29
Diluted earnings 0.80 0.47 0.23
Diluted cash earnings (1) 0.96 0.58 0.29
Book value per common share at year end 9.68 9.00 5.91
Tangible book value per common share at year end 5.69 5.20 4.07
Closing market price 9.88 12.19 N/A
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AT YEAR END
Total assets $ 464,962 439,123 231,191
Earning assets 373,526 353,031 191,708
Loans 336,735 269,191 154,913
Allowance for loan losses 2,739 2,590 1,364
Non-interest bearing deposits 86,991 91,510 56,929
Total deposits 372,742 377,572 206,215
Shareholders' equity 58,727 54,377 17,868
Shares outstanding 6,069,370 6,040,608 2,250,980
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AVERAGE BALANCES
Total assets $ 443,014 261,604 162,028
Earning assets 359,552 218,687 140,837
Loans 301,052 170,667 115,179
Non-interest bearing deposits 86,377 56,392 40,955
Total deposits 374,825 235,201 145,480
Shareholders' equity 56,318 22,301 12,783
Shares outstanding:
Basic 6,040,618 2,691,987 2,100,423
Diluted 6,091,635 3,361,560 2,153,653
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PERFORMANCE
Return on assets 1.10% 0.75% 0.29%
Return on equity 8.62 8.78 3.71
Net interest margin (2),(3) 6.78 6.31 6.77
Efficiency ratio (1) 67 80 90
Loan to deposit ratio (at year end) 90 71 75
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ASSET QUALITY (at year end)
Net charge-offs to average loans 0.10% 0.07% 0.03%
Allowance for loan losses to loans 0.81 0.96 0.88
Allowance for loan losses to non-performing loans (4) 148.62 804.35 1002.94
Non-performing assets to loan-related assets (5),(6) 0.63 0.27 0.09
Risk assets to loan-related assets (6),(7) 0.64 0.67 0.14
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CAPITAL (at year end)
Equity to assets 12.63% 12.38% 7.73%
Tangible equity to assets 7.43 7.15 5.93
Leverage ratio 8.14 7.69 7.33
Risk-based capital ratios:
Tier 1 10.76 11.42 8.26
Total 11.59 12.34 10.15
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</TABLE>
(1) Cash earnings and selected financial ratios are based on income that
excludes amortization of intangible assets.
(2) Expenses associated with the mandatorily convertible debentures of $141
and $13 in 1998 and 1997, respectively, are not reflected in interest
expense in calculating the margin as the debentures were converted to
common stock in connection with the December 1998 Initial Public Offering.
(3) Net interest margin is reported on a fully taxable equivalent basis.
(4) Non-performing loans consist of nonaccrual and restructured loans that are
in noncompliance with their revised terms.
(5) Non-performing assets consist of non-performing loans and foreclosed
properties.
(6) Loan related assets consist of total loans and foreclosed properties.
(7) Risk assets consist of non-performing assets and loans 90 days or more past
due but continuing to accrue interest.
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CERTAIN FACTORS AFFECTING FORWARD-LOOKING STATEMENTS
This Annual Report on form 10-KSB contains certain forward-looking
statements (as such term is defined in the Securities Act of 1933, as amended
(the "Securities Act")) concerning Vail Banks' mergers, operations, performance
and financial condition, including, in particular, the likelihood of Vail Banks'
success in developing and expanding its business. These statements are based
upon a number of assumptions and estimates which are inherently subject to
significant uncertainties, many of which are beyond the control of Vail Banks.
Consequently, actual results may differ materially from those expressed or
implied by such forward-looking statements. Factors that could cause actual
results to differ materially include, but are not limited to, those set forth
below.
RISKS INVOLVED IN MERGER AND ACQUISITION STRATEGY
Vail Banks believes that a portion of its growth will come from mergers
with and acquisitions of banks and other financial institutions. Vail Banks
merged with Telluride (the "Telluride merger") in December 1998. It merged with
Independent (the "Independent merger") in July 1998. Mergers and acquisitions
involve risk of (1) changes in results of operations, (2) unforeseen liabilities
relating to the merged institutions, (3) asset quality problems of the merged
entity and (4) other conditions not within the control of Vail Banks. Such other
conditions include adverse personnel relations, loss of customers because of
change of identity, deterioration in local economic conditions and other risks
affecting the merged institutions.
Vail Banks cannot assure that any acquisition or merger that it completes
will enhance its business or results of operations. Mergers or acquisitions may
have an adverse effect upon Vail Banks' results of operations, particularly
during periods in which the mergers or acquisitions are being integrated into
Vail Banks' operations. Vail Banks must compete with a variety of individuals
and institutions for suitable merger and acquisition candidates. This
competition includes bank holding companies with greater resources than Vail
Banks. Furthermore, merger and acquisition candidates may not be available or
available on terms favorable to Vail Banks. Such competition could affect Vail
Banks' ability to pursue mergers and acquisitions.
In addition, as a result of the growth from mergers, Vail Banks' management
must successfully integrate the operations of merged institutions. Vail Banks
must (1) consolidate data processing operations, (2) combine employee benefit
plans, (3) integrate deposit and lending products, (4) develop unified marketing
plans and (5) consolidate other related areas. Vail Banks will incur additional
expenses to accomplish these goals. These expenditures could negatively impact
Vail Banks' net income. Completion of these tasks could divert management's
attention from other important issues. In addition, the process of merging and
acquiring banks and other financial institutions could have a material adverse
effect on the operation of their businesses. These effects could have an adverse
impact on combined operations. Vail Banks may also incur additional unexpected
costs in connection with the integration of merged and acquired banks, which
could negatively impact Vail Banks' net income.
NEED FOR ADDITIONAL FINANCING
Vail Banks' ability to merge with and acquire financial institutions may
depend on its ability to obtain additional debt or equity funding. Vail Banks
cannot assure that it will be successful in consummating any future financing
transactions. Factors which could affect Vail Banks' access to the capital
markets, or the costs of such capital, include (1) changes in interest rates,
(2) general economic conditions and the perception in the capital markets of
Vail Banks' business, (3) results of operations, (4) leverage, (5) financial
condition and (6) business prospects. Each of these factors is to a large extent
subject to economic, financial, competitive and other factors beyond Vail Banks'
control. Borrowing restrictions contained in certain regulations which apply to
Vail Banks and its subsidiary may also have an effect on Vail Banks' ability to
obtain additional financing. Vail Banks' future credit facilities may
significantly restrict its ability to incur additional indebtedness. Vail Banks'
ability to repay any then outstanding indebtedness at maturity may depend on its
ability to refinance such indebtedness. Its
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ability to refinance could be adversely affected if Vail Banks is not able to
sell additional debt or equity securities on terms reasonably satisfactory to
Vail Banks.
LOCAL ECONOMIC CONDITIONS
The success of Vail Banks depends to a great extent upon general economic
conditions in the communities it serves. Vail Banks primarily operates on the
Western Slope. Some parts of the Western Slope are largely dependent on seasonal
tourism that particularly affects small-to-medium size businesses. These
businesses are a significant portion of Vail Banks' customers. The seasonality
of Vail Banks' business in those areas results in fluctuations in deposit and
credit needs. Deposits tend to peak during the ski season. In addition, a
decline in the economy of these areas could have a material adverse effect on
Vail Banks' business. A decline could affect (1) the demand for new loans, (2)
refinancing activity, (3) the ability of borrowers to repay outstanding loans
and (4) the value of loan collateral. A decline could also adversely affect
asset quality and net income. See "Business--General" in this Item 1.
DEPENDENCE UPON KEY PERSONNEL
The continued success of Vail Banks substantially depends upon the efforts
of the directors and executive officers of Vail Banks. Vail Banks particularly
depends on E.B. Chester, Jr. and Lisa M. Dillon. The success of Vail Banks
depends in large part on the retention of present key management personnel. It
also depends on Vail Banks' ability to hire and retain additional qualified
personnel in the future. Neither Mr. Chester nor Ms. Dillon has entered into
employment agreements with Vail Banks. Vail Banks does not maintain key-person
life insurance coverage on either of them.
CERTAIN ANTI-TAKEOVER PROVISIONS
Vail Banks' Articles of Incorporation and Bylaws contain certain provisions
that may delay, discourage or prevent an attempted acquisition or change in
control of Vail Banks. These provisions include (1) a Board of Directors
classified into three classes of directors with the directors of each class
having staggered, three-year terms and providing for the removal of directors
only for cause, and (2) noncumulative voting for directors. Vail Banks' Articles
of Incorporation authorize the Board of Directors of Vail Banks to issue shares
of preferred stock of Vail Banks without shareholder approval. The preferred
stock may be issued upon any terms that the Board of Directors may determine.
The issuance of preferred stock may provide desirable flexibility in connection
with possible mergers, acquisitions, financings and be used for other corporate
purposes. However, the preferred stock makes it more difficult for a third party
to acquire, or discourage a third party from acquiring, a controlling interest
in Vail Banks.
GOVERNMENT REGULATION
The banking industry is regulated by federal and state regulatory
authorities. The Federal Reserve and the CDB supervise and regularly examine
Vail Banks and WestStar. Federal and state banking law regulates and limits Vail
Banks' credit extensions, securities purchases, dividend payments, acquisitions,
branching and many other aspects of the banking business. Banking laws are
designed primarily to protect depositors and customers, not investors. These
laws include, among other things, (1) minimum capital requirements, (2)
limitations on products and services offered, (3) geographical limits, (4)
consumer credit regulations, (5) community investment requirements and (6)
restrictions on transactions with affiliated parties.
Financial institution regulation has been the subject of significant
legislation in recent years. This regulation may be the subject of further
significant legislation in the future. Vail Banks has no control over changes in
regulation. Regulations substantially affect the business and financial results
of all financial institutions and holding companies, including Vail Banks and
WestStar. Vail Banks cannot predict the impact of changes in such regulations on
Vail Banks' business and profitability. Changes in regulation could adversely
affect Vail Banks' financial condition and results of operations. See
"Supervision and Regulation" in this Item 1.
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<PAGE> 11
COMPETITION
The banking business is highly competitive. The profitability of Vail Banks
depends principally upon its ability to compete in its market areas. Vail Banks
competes with other commercial banks, savings institutions, credit unions,
finance companies, brokerage and investment banking firms, insurance companies,
asset-based lenders and certain other nonfinancial institutions, including
retail stores which offer credit programs and governmental organizations that
offer financing programs. Many competitors may have greater financial and other
resources than Vail Banks. Vail Banks has been able to compete effectively with
other financial institutions by (1) emphasizing customer service, technology and
local office decision-making, (2) establishing long-term customer relationships
and building customer loyalty, and (3) providing products and services designed
to address the specific needs of its customers. Vail Banks may not be able to
continue to compete effectively in the future. Further, changes in government
regulation of banking, particularly recent legislation which removes
restrictions on interstate banking and permits interstate branching, are likely
to increase competition by out-of-state banking organizations or by other
financial institutions in Vail Banks' market areas. See "Business--Competition"
in this Item 1.
CONTROL BY MANAGEMENT
The directors and executive officers of Vail Banks beneficially own
approximately 35% of the outstanding Common Stock. Furthermore, E. B. Chester,
Jr., Chairman of Vail Banks, beneficially owns approximately 20% of the
outstanding Common Stock. Accordingly, these persons will have substantial
influence over the business, policies and affairs of Vail Banks, including the
ability to potentially control the election of directors and other matters
requiring shareholder approval by simple majority vote.
INTEREST RATE RISK
Vail Banks' earnings depend to a great extent on its net interest income.
Net interest income is the difference between interest income earned on loans
and investments and the interest expense paid on deposits and other borrowings.
The net interest margin is highly sensitive to many factors that are beyond Vail
Banks' control. These factors include general economic conditions and the
policies of various governmental and regulatory authorities. Changes in the
discount rate or targeted federal funds rate by the Federal Reserve usually lead
to general changes in interest rates. These interest rate shifts affect Vail
Banks' interest income, interest expense and investment portfolio. Also,
governmental policies, such as the creation of a tax deduction for individual
retirement accounts, can increase savings and affect the cost of funds. From
time to time, the interest rate structures of earning assets and liabilities may
not be balanced, and a rapid increase or decrease in interest rates could have
an adverse effect on the net interest margin and results of operations of Vail
Banks. Vail Banks cannot predict the nature, timing and effect of any future
changes in federal monetary and fiscal policies.
YEAR 2000 COMPLIANCE
Vail Banks did not experience any material disruptions in its or its
subsidiary's operations or activities as a result of the so-called "Year 2000"
problem. In addition, Vail Banks or its subsidiary did not incur material
expenses in correcting perceived or suspected Year 2000 problems. Furthermore,
Vail Banks is not aware that any of its suppliers or customers have experienced
any material disruptions in their operations or activities due to Year 2000
problems. Vail Banks does not expect to encounter any such problems in the
foreseeable future, although it continues to monitor its computer operations for
signs or indications of such problems.
It is possible, however, that Year 2000 problems could still disrupt
Vail Banks' or its subsidiary's operations and the systems of other companies
upon which their systems rely. If Vail Banks' or its subsidiary's systems or the
systems of their customers, product vendors, utility vendors, and suppliers
experience unforeseen Year 2000 problems in the future, such problems may
negatively impact Vail Banks' systems, operations and financial performance.
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<PAGE> 12
SUPERVISION AND REGULATION
The following discussion of statutes and regulations affecting bank
holding companies and banks is a summary thereof and is qualified in its
entirety by reference to such statutes and regulations.
GENERAL. Vail Banks is a registered bank holding company subject to
regulation by the Board of Governors of the Federal Reserve System (the "Federal
Reserve") under the Bank Holding Company Act of 1956, as amended (the "Act").
Vail Banks is required to file financial information with the Federal Reserve
periodically and is subject to periodic examination by the Federal Reserve.
The Act requires every bank holding company to obtain the Federal
Reserve's prior approval before (1) it may acquire direct or indirect ownership
or control of more than 5% of the voting shares of any bank that it does not
already control; (2) it or any of its non-bank subsidiaries may acquire all or
substantially all of the assets of a bank; and (3) it may merge or consolidate
with any other bank holding company. In addition, a bank holding company is
generally prohibited from engaging in, or acquiring, direct or indirect control
of the voting shares of any company engaged in non-banking activities. This
prohibition does not apply to activities listed in the Act or found by the
Federal Reserve, by order or regulation, to be closely related to banking or
managing or controlling banks as to be a proper incident thereto. Some of the
activities that the Federal Reserve has determined by regulation or order to be
closely related to banking include:
o making or servicing loans and certain types of leases;
o performing certain data processing services;
o acting as fiduciary or investment or financial advisor;
o providing brokerage services;
o underwriting bank eligible securities;
o underwriting debt and equity securities on a limited basis
through separately capitalized subsidiaries; and
o making investments in corporations or projects designed
primarily to promote community welfare.
Although, the activities of bank holding companies have traditionally
been limited to the business of banking and activities closely related or
incidental to banking, as discussed above, on November 12, 1999 the
Gramm-Leach-Bliley Act was signed into law which will, effective March 11, 2000,
relax the previous limitations and permit bank holding companies to engage in a
broader range of financial activities. Specifically, bank holding companies may
elect to become financial holding companies which may affiliate with securities
firms and insurance companies and engage in other activities that are financial
in nature. Among the activities that will be deemed "financial in nature"
include:
o lending, exchanging, transferring, investing for others or
safeguarding money or securities;
o insuring, guaranteeing, or indemnifying against loss, harm,
damage, illness, disability, or death, or providing and
issuing annuities, and acting as principal, agent, or broker
with respect thereto;
o providing financial, investment, or economic advisory
services, including advising an investment company;
o issuing or selling instruments representing interests in pools
of assets permissible for a bank to hold directly; and
o underwriting, dealing in or making a market in securities.
A bank holding company may become a financial holding company under the
new statute only if each of its subsidiary banks is well capitalized, is well
managed and has at least a satisfactory rating under the Community Reinvestment
Act. A bank holding company that falls out of compliance with such requirement
may be required to cease engaging in certain activities. Any bank holding
company which does not elect to become a financial holding company remains
subject to the current restrictions of the Bank Holding Company Act.
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<PAGE> 13
Under the new legislation, the Federal Reserve Board serves as the
primary "umbrella" regulator of financial holding companies with supervisory
authority over each parent company and limited authority over its subsidiaries.
The primary regulator of each subsidiary of a financial holding company will
depend on the type of activity conducted by the subsidiary. For example,
broker-dealer subsidiaries will be regulated largely by securities regulators
and insurance subsidiaries will be regulated largely by insurance authorities.
Implementing regulations under the Gramm-Leach-Bliley Act have not yet
been promulgated and Vail Banks cannot predict the full impact of the new
legislation and has not yet determined whether it will ever elect to become a
financial holding company.
Vail Banks must also register with the CDB and file periodic
information with the CDB. As part of such registration, the CDB requires
information with respect to, among other matters, the financial condition,
operations, management and intercompany relationships of Vail Banks and its
subsidiary. The CDB may also require such other information as is necessary to
ascertain whether the provisions of Colorado law and the regulations and orders
issued thereunder by the CDB have been complied with, and the CDB may examine
Vail Banks and its subsidiary.
Vail Banks is an "affiliate" of its banking subsidiary under the
Federal Reserve Act, which imposes certain restrictions on (1) loans by WestStar
to Vail Banks, (2) investments in the stock or securities of Vail Banks by its
banking subsidiary, (3) its banking subsidiary's taking the stock or securities
of an "affiliate" as collateral for loans by it to a borrower and (4) the
purchase of assets from Vail Banks by its banking subsidiary. Further, a bank
holding company and its subsidiaries are prohibited from engaging in certain
tie-in arrangements in connection with any extension of credit, lease or sale of
property or furnishing of services.
WestStar is a member of the Federal Reserve Bank of Kansas City and is
subject to the supervision of and is regularly examined by the Federal Reserve.
Furthermore, WestStar, as a state banking association organized under Colorado
law, is subject to the supervision of, and is regularly examined by the CDB.
Both the Federal Reserve and the CDB must grant prior approval of any merger,
consolidation or other corporation reorganization involving WestStar. A bank can
be held liable for any loss incurred by, or reasonably expected to be incurred
by, the FDIC in connection with the default of a commonly-controlled
institution.
PAYMENT OF DIVIDENDS. Vail Banks is a legal entity separate and
distinct from its banking subsidiary. Most of the revenues of Vail Banks result
from dividends paid to it by its banking subsidiary. There are statutory and
regulatory requirements applicable to the payment of dividends by Vail Bank's
banking subsidiary, as well as by Vail Banks to its shareholders.
WestStar is a state chartered bank regulated by the CDB and the Federal
Reserve. Under the regulations of the CDB and the Federal Reserve, approval of
the regulators will be required if the total of all dividends declared by such
state bank in any calendar year shall exceed the total of its net profits of
that year combined with its retained net profits of the preceding two years,
less any required transfers to a fund for the retirement of any preferred stock.
The payment of dividends by Vail Banks and WestStar may also be affected or
limited by other factors, such as the requirement to maintain adequate capital
above regulatory guidelines. In addition, if, in the opinion of the applicable
regulatory authority, a bank under its jurisdiction is engaged in or is about to
engage in an unsafe or unsound practice (which, depending upon the financial
condition of the bank, could include the payment of dividends), such authority
may require, after notice and hearing, that such bank cease and desist from such
practice. In addition to the formal statutes and regulations, regulatory
authorities consider the adequacy of a bank's total capital in relation to its
assets. Capital adequacy considerations could further limit the availability of
dividends. At December 31, 1999, net assets available from WestStar to pay
dividends without prior approval from regulatory authorities totaled $5.6
million.
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<PAGE> 14
MONETARY POLICY. The results of operations of WestStar are affected by
credit policies of monetary authorities, particularly the Federal Reserve. The
instruments of monetary policy employed by the Federal Reserve include open
market operations in U.S. government securities, changes in the discount rate on
bank borrowings and changes in reserve requirements against bank deposits. In
view of changing conditions in the national economy and in the money markets, as
well as the effect of actions by monetary and fiscal authorities, including the
Federal Reserve, no prediction can be made as to possible future changes in
interest rates, deposit levels, loan demand or the business and earnings of Vail
Banks' banking subsidiary.
CAPITAL ADEQUACY. The Federal Reserve and the FDIC have implemented
substantially identical risk-based rules for assessing bank and bank holding
company capital adequacy. These regulations establish minimum capital standards
in relation to assets and off-balance sheet exposures as adjusted for credit
risk. To be considered "adequately capitalized," banks and bank holding
companies are required to have (i) a minimum level of total capital (as defined)
to risk-weighted assets of 8%; (ii) a minimum Tier 1 capital (as defined) to
risk-weighted assets of 4%; and (iii) a minimum shareholders' equity to
risk-weighted assets of 4%. In addition, the Federal Reserve and the FDIC have
established a minimum 3% leverage ratio (Tier 1 capital to average assets) for
the most highly-rated banks and bank holding companies. "Tier 1 capital"
generally consists of common equity not including unrecognized gains and losses
on securities, minority interests in equity accounts of consolidated
subsidiaries and certain perpetual preferred stock less certain intangibles. The
Federal Reserve and the FDIC will require a bank holding company and a bank,
respectively, to maintain a leverage ratio greater than 3% if either is
experiencing or anticipating significant growth or is operating with less than
well-diversified risks in the opinion of the Federal Reserve. The Federal
Reserve and the FDIC use the leverage ratio in tandem with the risk-based ratio
to assess the capital adequacy of banks and bank holding companies. The FDIC and
the Federal Reserve have amended, effective January 1, 1997, the capital
adequacy standards to provide for the consideration of interest rate risk in the
overall determination of a bank's capital ratio, requiring banks with greater
interest rate risk to maintain greater capital for the risk.
In addition, Section 38 of the Federal Deposit Insurance Act implemented
the prompt corrective action provisions that Congress enacted as a part of the
Federal Deposit Insurance Corporation Improvement Act of 1991 (the "1991 Act").
The "prompt corrective action" provisions set forth five regulatory zones in
which all banks are placed largely based on their capital positions. Regulators
are permitted to take increasingly harsh action as a bank's financial condition
declines. Regulators are also empowered to place in receivership or require the
sale of a bank to another depository institution when a bank's capital leverage
ratio reaches 2%. Better capitalized institutions are generally subject to less
onerous regulation and supervision than banks with lesser capital ratios.
The FDIC and the Federal Reserve have adopted regulations implementing
the prompt corrective action provisions of the 1991 Act, which place financial
institutions in the following five categories based upon capitalization ratios
(i) a "well capitalized" institution has a total risk-based capital ratio of at
least 10%, a Tier 1 risk-based capital ratio of at least 6% and a leverage ratio
of at least 5%; (ii) an "adequately capitalized" institution has a total
risk-based capital ratio of at least 8%, a Tier 1 risk-based capital ratio of at
least 4% and a leverage ratio of at least 4%; (iii) an "undercapitalized"
institution has a total risk-based capital ratio of under 8%, a Tier 1 capital
risk-based ratio of under 4% or a leverage ratio of under 4%; (iv) a
"significantly undercapitalized" institution has a total risk-based capital
ratio of under 6%, a Tier 1 risk-based ratio of under 3% or a leverage ratio of
under 3%; and (v) a "critically undercapitalized" institution has a leverage
ratio of 2% or less. Institutions in any of the three undercapitalized
categories would be prohibited from declaring dividends or making capital
distributions. The Federal Reserve regulations also establish procedures for
"downgrading" an institution to a lower capital category based on supervisory
factors other than capital.
Under the Federal Reserve's regulations, Vail Banks exceeded "well
capitalized" minimum requirements at December 31, 1999, with Tier 1 and total
risk-based capital ratios of 10.8% and 11.6%, respectively, and a leverage ratio
of 8.1%.
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<PAGE> 15
RECENT DEVELOPMENTS.
On November 12, 1999, President Clinton signed the Gramm-Leach-Bliley
Act, a very significant piece of legislation intended to modernize the financial
services industry. The bill repeals the anti-affiliation provisions of the 1933
Glass-Steagall Act to allow for the merger of banking and securities
organizations and permits banking organizations to engage in insurance
activities including insurance underwriting. The bill also allows bank holding
companies to engage in financial activities that are "financial in nature or
complementary to a financial activity." The act lists the expanded areas that
are financial in nature and includes insurance and securities underwriting and
merchant banking among others. The bill also:
o prohibits non-financial entities from acquiring or
establishing a thrift while grandfathering existing thrifts
owned by non-financial entities.
o establishes state regulators as the appropriate functional
regulators for insurance activities but provides that state
regulators cannot "prevent or significantly interfere" with
affiliations between banks and insurance firms.
o contains provisions designed to protect consumer privacy. The
bill requires financial institutions to disclose their policy
for collecting and protecting confidential information and
allows consumers to "opt out" of information sharing except
with unaffiliated third parties who market the institutions'
own products and services or pursuant to joint agreements
between two or more financial institutions.
o provides for functional regulation of a bank's securities
activities by the Securities and Exchange Commission.
Various portions of the bill have different effective dates, ranging
from immediately to more than a year for implementation.
EXECUTIVE OFFICERS OF VAIL BANKS
Certain information regarding the executive officers of the Company is
set forth in the following table and paragraphs.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
E.B. Chester, Jr. 57 Chairman of the Board
Lisa M. Dillon 46 President and Chief Executive Officer
</TABLE>
Mr. Chester, who formed Vail Banks through a series of acquisitions,
has served as Chairman of the Board of Directors of Vail Banks since 1993 and
the Chairman of the Board of Directors of WestStar since 1989. Mr. Chester is
also currently Manager of King Creek Ranch LLC, a ranching business. From 1986
to 1997, Mr. Chester served as the Chief Executive Officer of First Carolina
Cable TV, LP, a cable television company, and from 1987 to 1997 served as the
Chief Executive Officer of the corporate general partner of Outdoor East, LP, an
outdoor advertising firm.
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<PAGE> 16
Ms. Dillon has served as the President and Chief Executive Officer and
director of Vail Banks since 1993. Ms. Dillon, who started her career with
WestStar in 1979, also has served as President of WestStar from 1989 to 1999 and
Chief Executive Officer of WestStar since 1989.
ITEM 2. DESCRIPTION OF PROPERTIES.
As of March 1, 2000, Vail Banks had 26 offices, 15 of which are leased
and 11 of which are owned. The properties range in size from 1,400 square feet
to 34,000 square feet. None of the properties owned by Vail Banks secures the
outstanding balance of the purchase prices for the properties. The aggregate
annual lease payments for properties in 1999 were $590,000. Leases for the
facilities expire at various periods between 2000 and 2011. Vail Banks considers
its properties adequate for its current needs.
ITEM 3. LEGAL PROCEEDINGS.
Vail Banks and its banking subsidiary periodically are parties to or
otherwise involved in legal proceedings arising in the normal course of
business, such as claims to enforce liens, claims involving the making and
servicing of real property loans and other issues incident to their business.
Management does not believe that there is any pending or threatened proceeding
against Vail Banks or its banking subsidiary which, if determined adversely,
would have a material effect on the business, results of operations, or
financial position of Vail Banks or its banking subsidiary.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to security holders during the fourth quarter
of the 1999 fiscal year.
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<PAGE> 17
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKETS FOR CAPITAL STOCK
Vail Banks' Common Stock began trading on The Nasdaq Stock Market under
the symbol "VAIL" on December 10, 1998. Prior to that time, there was no formal
trading market for the Common Stock. The following table sets forth for the
periods indicated the high and low sales prices of the Common Stock on The
Nasdaq Stock Market.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1998
Fourth Quarter (from December 10, 1998)......................... $14.00 $12.00
1999
First Quarter................................................... $12.88 $12.06
Second Quarter.................................................. 12.13 9.50
Third Quarter................................................... 12.25 8.88
Fourth Quarter.................................................. 10.88 8.75
</TABLE>
HOLDERS
As of March 1, 2000, there were 145 holders of record of the Common
Stock. Investors who beneficially own Common Stock that is held in street name
by brokerage firms or similar holders are not included in this number. Vail
Banks believes that there are approximately 2,436 beneficial holders of the
Common Stock.
DIVIDENDS
Holders of Common Stock will be entitled to receive dividends when, as and
if declared by Vail Banks' Board of Directors out of funds legally available
therefor. Vail Banks has not paid cash dividends on its Common Stock since 1996.
The final determination of the timing, amount and payment of dividends on the
Common Stock is at the discretion of the Board of Directors. It will depend on
conditions then existing, including Vail Banks' profitability, financial
condition, capital requirements, future growth plans and other relevant factors.
The principal source of Vail Banks' income is dividends from its banking
subsidiary. The payment of dividends by WestStar is subject to certain
restrictions imposed by the federal and state banking laws and regulations. See
"Supervision and Regulation" in Item 1.
Vail Banks' ability to pay cash dividends on the Common Stock is also
subject to statutory restrictions, including banking regulations, and
restrictions arising under the terms of securities or indebtedness which may be
issued or incurred in the future. The terms of such securities or indebtedness
may restrict payment of dividends on Common Stock until required payments and
distributions are made on such securities or indebtedness. Under regulations of
the CDB and the Federal Reserve, approval of the regulators will be required if
the total of all dividends declared by any banking subsidiary in any year
exceeds the total of its net profits of that year combined with its retained net
profits of the preceding two years.
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<PAGE> 18
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF
OPERATION FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
INTRODUCTION
The following discussion and analysis presents management's review of the
operating results and financial condition of Vail Banks, Inc. ("Vail Banks"). It
provides information that is not otherwise apparent from the Consolidated
Financial Statements and related footnotes and is intended to assist readers in
evaluating Vail Banks' performance. The following analysis should be read in
conjunction with the Consolidated Financial Statements and accompanying notes as
well as the selected financial information presented in other sections of the
report.
CORPORATE PROFILE
Vail Banks is a bank holding company headquartered in Vail, Colorado with
assets of $465.0 million at December 31, 1999. Vail Banks' wholly owned
subsidiary, WestStar Bank ("WestStar"), is a Colorado state bank with 25 retail
offices located primarily in the western slope region of Colorado.
MERGERS
Mergers and acquisitions continue to be part of Vail Banks' overall
growth strategy, providing over half of Vail Banks' growth since 1996. All
mergers listed below have been accounted for under the purchase method of
accounting, and accordingly, the purchase price of each transaction has been
allocated to the assets acquired and the liabilities assumed based on their
estimated fair values at the date of the merger. The Consolidated Financial
Statements include the operations of each of the acquired entities since the
dates of the respective transactions. The excess of purchase price over net
assets has been recorded as goodwill, which is amortized over 25 years. Although
the amortization of goodwill does not result in a cash expense, it has a
substantial effect on reported earnings. See "Cash Operating Results" below for
further discussion on the effects of goodwill amortization on reported earnings.
Telluride Bancorp, Ltd. ("Telluride"). On December 15, 1998, Vail Banks
consummated the Telluride merger by paying cash of $13.3 million and issuing
908,913 shares of Vail Banks Common Stock. As of the merger date, Telluride had
assets of $132.9 million, net loans of $80.6 million, deposits of $119.9 million
and equity capital of $10.8 million. The Telluride merger had only minimal
effect on income and average balances for the year 1998, as the transaction
closed with only 16 days remaining in the year. The effect on results of
operations for the first eleven months of 1998, had the purchase transaction
occurred at the beginning of the year, would have been material.
Independent Bankshares, Inc. ("Independent"). On July 31, 1998, Vail
Banks consummated the Independent merger by paying cash of $3.8 million and
issuing 318,770 shares of Vail Banks Common Stock. As of the merger date,
Independent had assets of $30.3 million, net loans of $17.0 million, deposits of
$27.4 million and equity capital of $2.6 million. The effect on results of
operations for the first seven months of 1998, had the purchase transaction
occurred at the beginning of the year, would have been material.
Cedaredge Financial Services, Inc. ("Cedaredge"). On December 1, 1997,
Vail Banks consummated the Cedaredge merger by paying cash of $3.3 million, and
assuming certain obligations of $458,000 and the Series I and Series II
Convertible Notes (the "Mandatorily Convertible Debentures") totaling $1.6
million. As of the date of the merger, Cedaredge had assets of $45.5 million,
net loans of $33.9 million, deposits of $42.0 million and equity capital of $3.0
million. The Mandatorily Convertible Debentures were converted to Vail Banks
Common Stock subsequent to Vail Banks' initial public offering in December 1998
(the "Offering"). The effect on results of operations for the first eleven
months of 1997, had the purchase transaction occurred at the beginning of the
year, would have been material.
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<PAGE> 19
Other Transactions. On May 21, 1999, Vail Banks acquired $36.8 million
of deposits and the real estate of the Glenwood Springs, Colorado branch of
World Savings of Oakland, California ("World Savings"). World Savings retained
the mortgage loans it owned in Glenwood Springs. The acquisition makes WestStar
one of the largest depository institutions in the Glenwood Springs market.
Additionally, on November 8, 1999, WestStar entered into an agreement to acquire
First Western Services, Inc. ("First Western"), for consideration that included
cash, Vail Banks Common Stock, and installment notes. The acquisition closed on
January 1, 2000, adding mortgage brokerage to WestStar's lending services. See
Item 1. "Business-- Recent Mergers" for further information on these
transactions and the mergers described above.
FINANCIAL OVERVIEW
Net income for 1999 increased $2.9 million, or 147.9%, to $4.9 million
from $2.0 million in 1998. This increase is largely the result of the Telluride
and Independent mergers, as discussed above, quality loan growth, and
improvements in operating efficiency, coupled with a strong net interest margin.
Net income for 1998 increased $1.5 million, or 313.3%, from $474,000 in 1997.
The return on average assets was 1.10% for the year ended December 31,
1999 compared to 0.75% for year ended December 31, 1998. The return on average
assets was 0.29% for the year ended December 31, 1997.
The return on average equity was 8.62% for the year ended December 31,
1999 compared to 8.78% for the year ended December 31, 1998. The return on
average equity was 3.71% for the year ended December 31, 1997.
Year-end assets increased by $25.8 million, or 5.9%, to $465.0 million in
1999. This growth was a result of internally generated loan growth, spurred by a
strong local economy, and the May 1999 World Savings acquisition. In 1998,
assets grew by 89.9%, to $439.1 million from $231.2 million in 1997. Growth in
1998 was primarily achieved through the acquisitions of Independent and
Telluride, as discussed above, and, to a lesser extent, through internal growth.
The increase in net interest income on a fully taxable equivalent basis
("FTE") of 76.7% to $24.4 million in 1999 from $13.8 million in 1998 was
primarily from the growth in average loans. Average loans rose to $301.1 million
in 1999 from $170.7 million in 1998, an increase of 76.4%. Similarly, average
earning assets were $359.6 million in 1999, up 64.4% from $218.7 million in
1998. The full-year impact of the loans obtained in the 1998 Telluride and
Independent mergers significantly contributed to higher average loan and earning
asset balances in 1999. The 48.2% increase in average loans in 1998, including
the impact of the $33.9 million in loans obtained from the Cedaredge
acquisition, was the most significant factor for the increase in that year's FTE
net interest income.
Vail Banks is utilizing its tax loss carryforward position, obtained from
a merger in 1993, by taking funds that would normally have been used to pay
taxes and using those funds to expand its banking business and facilities. Under
GAAP requirements, however, net income must be reported net of an equivalent
expense that would have been paid for taxation. Therefore, both the expenses
associated with these investments and the "equivalent taxation" amount reduce
net income. These investments, such as de novo retail offices, advanced
real-time information technology networks, and item imaging systems, have
increased expenses and put downward pressure on returns on assets and equity in
the current and immediate historical periods. Vail Banks believes such
investments will yield significant returns in future periods.
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<PAGE> 20
CASH OPERATING RESULTS
As a result of the acquisitions of Telluride, Independent, Cedaredge,
World Savings and an acquisition occurring in 1995, Vail Banks had goodwill of
$24.2 million and $23.0 million at December 31, 1999 and 1998, respectively.
Since the amortization of goodwill does not result in a cash expense, Vail Banks
believes that supplemental reporting of its operating results on a "cash" (or
"tangible") basis (which excludes the after-tax effect of amortization of
goodwill and the related asset balance) represents a relevant measure of
financial performance. The supplemental cash basis data presented herein does
not exclude the effect of other non-cash operating expenses such as
depreciation, provision for loan losses, or deferred income taxes associated
with the results of operations.
Cash earnings rose 158.9% to $5.8 million in 1999 from $2.3 million in
1998. Diluted cash earnings per share in 1999 were up 65.5% to $0.96, from $0.58
in 1998. In 1997, cash earnings were $607,000 while diluted cash earnings per
share were $0.29.
Based on cash earnings, return on average tangible assets was 1.39% in
1999, compared with 0.88% in 1998, and return on average tangible common equity
was 17.89% in 1999, compared with 13.72% in 1998.
RESULTS OF OPERATIONS
Net Interest Income. Net interest income continues to be Vail Banks'
principal source of income, representing the difference between interest and
fees earned on loans and investments, and interest paid on interest bearing
liabilities. In this discussion, FTE net interest income is presented whereby
tax exempt income, such as interest on securities of state and municipalities,
has been increased to an amount that would have been earned had such income been
taxable. This adjustment places taxable and nontaxable income on a common basis
and permits comparisons of rates and yields. Additionally, expenses associated
with the Mandatorily Convertible Debentures are not reflected in interest
expense as the debentures were converted to common shares in connection with the
Offering.
In 1999, FTE net interest income rose $10.6 million, or 76.7%, to $24.4
million from $13.8 million in 1998, largely the result of growth in average
earning assets, which increased $140.9 million, or 64.4%, to $359.6 million in
1999 from $218.7 million in 1998. FTE net interest income and average earning
assets in 1997 were $9.5 million and $140.8 million, respectively.
The following table sets forth the average balances, net interest
income and expense and average yields and rates for Vail Banks' earnings assets
and interest bearing liabilities for the periods indicated on a taxable
equivalent basis.
20
<PAGE> 21
NET INTEREST INCOME ANALYSIS
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------- -------------------------- -------------------------
(in thousands on a fully taxable Average Avg. Average Avg. Average Avg.
equivalent basis) Balance Interest Rate Balance Interest Rate Balance Interest Rate
- -------------------------------- -------- -------- ----- ------- -------- ----- ------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold and other
short-term investments $ 18,262 854 4.68% 27,779 1,459 5.25% 9,396 496 5.28%
Investment securities:
Taxable 32,719 1,848 5.65 16,845 981 5.82 15,780 934 5.92
Tax exempt (1) 7,519 462 6.14 3,396 236 6.95 482 33 6.85
Loans (2) 301,052 32,076 10.65 170,667 18,787 11.01 115,179 12,570 10.91
-------- -------- ----- ------- ------ ----- ------- ------ -----
TOTAL EARNING ASSETS 359,552 35,240 9.80 218,687 21,463 9.81 140,837 14,033 9.96
Non-earning assets 83,462 42,917 21,191
-------- ------- -------
TOTAL ASSETS $443,014 261,604 162,028
======== ======= =======
LIABILITIES
Interest bearing deposits:
Interest being transaction accounts $202,887 6,219 3.07% 122,052 4,298 3.52% 81,750 2,971 3.63%
Certificates of deposit 85,561 4,159 4.86 56,757 3,228 5.69 22,775 1,280 5.62
-------- -------- ----- ------- ------ ----- ------- ------ -----
TOTAL INTEREST BEING DEPOSITS 288,448 10,378 3.60 178,809 7,526 4.21 104,525 4,251 4.07
Short-term borrowings 8,033 476 5.93 734 31 4.22 2,057 127 6.17
Notes payable 170 14 8.24 1,105 111 10.05 1,275 123 9.65
-------- -------- ----- ------- ------ ----- ------- ------ -----
TOTAL INTEREST BEARING
LIABILITIES (3) 296,651 10,868 3.66 180,648 7,668 4.24 107,857 4,501 4.17
Non-interest bearing demand deposits 86,377 56,392 40,955
Other liabilities 3,668 2,263 433
-------- ------- -------
TOTAL LIABILITIES 386,696 239,303 149,245
SHAREHOLDERS' EQUITY (3) 56,318 22,301 12,783
-------- ------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $443,014 261,604 162,028
======== ======= =======
TOTAL DEPOSITS $374,825 10,378 2.77% 235,201 7,526 3.20% 145,480 4,251 2.92%
======== ======== ===== ======= ====== ===== ======= ====== =====
RECAP: (4)
Interest income $ 35,240 9.80% 21,463 9.82% 14,033 9.97%
Interest expense (3) 10,868 3.02 7,668 3.51 4,501 3.20
-------- ----- ------ ----- ------ -----
NET INTEREST INCOME/MARGIN $ 24,372 6.78% 13,795 6.31% 9,532 6.77%
======== ===== ====== ===== ====== =====
</TABLE>
(1) Tax exempt securities have been adjusted to a fully taxable equivalent
basis using a marginal tax rate of 34%.
(2) Loans are presented net of unearned income and include nonaccrual
loans.
(3) Mandatorily convertible debentures are included in the "Shareholders'
equity" account, and expenses associated with the debentures are not
reflected in interest expense in this table as they were converted in
connection with the Initial Public Offering in December 1998.
(4) Average rates have been computed by dividing by total earning assets.
21
<PAGE> 22
The amount of net interest income is affected by changes in the volume
and mix of earning assets and interest bearing liabilities, and the interest
rates on these assets and liabilities. An analysis of how changes in volumes and
rates affected net interest income for the years ended December 31, 1999 and
1998 is presented below.
ANALYSIS OF CHANGES IN NET INTEREST INCOME*
<TABLE>
<CAPTION>
1999 over 1998 1998 over 1997
(in thousands) VOLUME RATE TOTAL Volume Rate Total
-------- ------ ------ ------ ---- -----
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Federal funds sold and other
short-term investments $ (500) (105) (605) 970 (7) 963
Investment securities
Taxable 924 (57) 867 63 (16) 47
Tax exempt 287 (61) 226 200 3 203
Loans 14,353 (1,064) 13,289 6,056 161 6,217
-------- ------ ------ ----- ---- -----
Total interest income 15,064 (1,287) 13,777 7,289 141 7,430
-------- ------ ------ ----- ---- -----
Interest Expense:
Interest bearing transaction accounts 2,847 (926) 1,921 1,465 (138) 1,327
Certificates of deposit 1,638 (707) 931 1,910 38 1,948
Short-term borrowings 308 137 445 (82) (14) (96)
Notes payable (94) (3) (97) (16) 4 (12)
-------- ------ ------ ----- ---- -----
Total interest expense 4,699 (1,499) 3,200 3,277 (110) 3,167
-------- ------ ------ ----- ---- -----
Change in net interest income $ 10,365 212 10,577 4,012 251 4,263
======== ====== ====== ===== ==== =====
</TABLE>
*Fully taxable equivalent.
Notes: The change in interest that cannot be attributed to only a change in
rate or a change in volume, but instead represents a combination of the
two factors, has been allocated to the rate variance. Expenses
associated with convertible debentures are not included in interest
expense.
The growth in average earning assets in 1999 and 1998 was largely
attributable to higher average loans outstanding. Average loans were $301.1
million in 1999, up 76.4% from $170.7 million in 1998 and 161.4% greater than
$115.2 million in 1997. The full-year impact of the loans obtained in the
December 1998 Telluride merger and the July 1998 Independent merger
significantly contributed to higher average loan balances in 1999 compared with
1998. Additionally, growth generated internally also contributed to higher loan
levels, with total loans increasing by $67.5 million, or 25.1%, to $336.7
million at year-end 1999 from $269.2 million in 1998.
Improvement in 1999's net interest income resulting from loan growth
contributed significantly to the increase in net interest margin, or
taxable-equivalent net interest income expressed as a percentage of average
earning assets. Vail Banks' net interest margin in 1999 was 6.78%, compared with
6.31% in 1998 and 6.77% in 1997, remaining well above industry averages. Net
interest margin is influenced by the level and relative mix of earning assets,
interest bearing liabilities and non-interest bearing liabilities.
Interest income increased to $35.2 million in 1999 from $21.5 million
in 1998 almost entirely as a result of the increase in loans as discussed above.
Commercial and Industrial loans increased by $34.7 million, while Real
Estate--Construction loans increased by $25.3 million, combining for 88.9% of
the increase. Somewhat offsetting the positive effect of the increased loan
volume, however, was a decrease in the average yield on the loan portfolio,
which is consistent with the overall decrease in the average prime rate in 1999
to 8.00% from 8.35% in 1998.
22
<PAGE> 23
Interest expense increased to $10.9 million in 1999 from $7.7 million
in 1998. The full-year impact of the interest bearing liabilities obtained in
the December 1998 Telluride merger and the July 1998 Independent merger
significantly contributed to higher average interest bearing deposit balances in
1999 compared with 1998. Interest bearing deposits acquired in the Telluride
acquisition were approximately $91.6 million, significantly contributing to the
$109.6 million increase in average interest bearing deposits experienced in
1999. The decrease in the cost of interest bearing liabilities to 3.66% in 1999
from 4.24% in 1998 was largely due to management's efforts to reduce high cost
certificates of deposit, specifically those from public entities. Similarly, the
$3.2 million increase in interest expense in 1998 resulted primarily from the
increases in interest bearing deposits obtained in the Cedaredge merger. The
cost of interest bearing deposits increased to 4.21% for 1998, from 4.07% in
1997.
Provision for Loan Losses. The amount of the provision for loan losses
is based on continual evaluations of the loan portfolio, with particular
attention directed toward non-performing, delinquent, and other potential
problem loans. During these evaluations, consideration is also given to such
factors as management's evaluation of specific loans, the level and composition
of delinquent and non-performing loans, historical loan loss experience, results
of examinations by regulatory agencies, external and internal asset review
processes, the market value of collateral, the strength and availability of
guarantees, concentrations of credit and other judgmental factors.
The provision for loan losses was $455,000 in 1999. In comparison, Vail
Banks recorded no provision for loan losses in 1998 and $232,000 in 1997. Net
charge-offs during 1999 equaled $306,000, resulting in a net increase in the
allowance for loan losses of $149,000 compared to a net decrease of $120,000,
excluding the effects of acquisitions, in 1998. At December 31, 1999, the
allowance to total loans was .81% and 149% of non-performing loans.
Non-Interest Income. The following table sets forth Vail Banks'
non-interest income for the periods indicated.
NON-INTEREST INCOME
<TABLE>
<CAPTION>
(in thousands) 1999 1998 1997
------ ----- -----
<S> <C> <C> <C>
Service charges on deposit accounts $ 912 489 335
NSF and return check charges 1,502 915 581
Other fee income 738 420 220
Rental income 565 489 12
Other 253 75 125
------ ----- -----
Total non-interest income $3,970 2,388 1,273
====== ===== =====
</TABLE>
Non-interest income rose $1.6 million, or 66.2%, to $4.0 million in
1999 from $2.4 million in 1998. Growth in service charges and other fees on
deposit accounts obtained in the Telluride and Independent acquisitions
contributed substantially to the increase. Approximately 56% of the increase in
non-interest income in 1999 was attributable to the former Telluride locations.
During 1998, total non-interest income increased $1.1 million, or
87.6%, to $2.4 million from $1.3 million for the comparable period in 1997 due
to increases in service charges and fees on deposit accounts in approximate
proportion to growth in those deposit levels achieved through both internal
growth and the Cedaredge acquisition. Also contributing to the increase was
rental income from third parties associated with the acquisition of Vail Banks'
main Vail location and a 54% interest in its Avon retail office building.
23
<PAGE> 24
Non-Interest Expense. The following table sets forth Vail Banks'
non-interest expense for the periods indicated.
NON-INTEREST EXPENSE
<TABLE>
<CAPTION>
(in thousands) 1999 1998 1997
------- ------ -----
<S> <C> <C> <C>
Salaries and employee benefits $ 9,929 6,954 5,086
Occupancy 2,174 1,626 1,325
Furniture and equipment 1,696 1,151 852
Amortization of intangible assets 984 297 133
Service fees 894 660 366
Professional fees 773 293 238
Telephone and data communications 708 359 209
Supplies and printing 463 425 342
Marketing and promotions 317 204 399
Postage and freight 312 195 137
Other 1,582 884 700
------- ------ -----
Total non-interest expense $19,832 13,048 9,787
======= ====== =====
</TABLE>
In 1999 non-interest expense was $19.8 million, an increase of $6.8
million, or 52.0%, from $13.0 million in 1998, which had increased from $9.8
million in 1997. The increase in non-interest expense during 1999 was primarily
due to the incremental increase in expenses associated with the Telluride merger
and, to a lesser extent, the Independent merger, including the amortization of
intangible assets associated with those purchase accounting transactions. The
increase in 1998 was largely the result of the addition of eight retail offices;
one through expansion, four from the Cedaredge merger, and three from the
Independent merger, which occurred mid-year 1998 and, thus, materially affected
both 1999 and 1998 operating results.
Salaries and employee benefits expense for 1999 were $9.9 million, an
increase of $3.0 million from $6.9 million in 1998. Although this represents an
increase of 42.8% in 1999, salaries and employee benefits as a percentage of
average assets declined to 2.2% from 2.7% in 1998, which was primarily the
result of efficiencies realized in the last half of 1999 largely due to the
Telluride merger. Salaries and employee benefits increased by $1.9 million from
$5.1 million in 1997. This increase was due to expansion through de novo
branches and the Independent and Cedaredge mergers. The number of full-time
equivalent associates at December 31, 1999, 1998, and 1997 were 227, 263, and
187, respectively.
Expenses associated with fixed assets, including occupancy and furniture
and equipment, rose $1.1 million and $600,000 in 1999 and 1998, respectively.
Increases in 1999 were the result of aforementioned mergers and the opening of
Vail Banks' new operations facility in Gypsum in March 1999. All of these
capital outlays have resulted, or are expected to result, in operating synergies
and cost savings. Similarly, increases is 1998 are attributable to expansion of
operations due to the Independent and Cedaredge mergers, as well as the purchase
of imaging equipment for check processing and distribution in June 1998.
Other expenses associated with the recent mergers have also increased in
both 1999 and 1998. Specifically, the amortization of intangibles increased
231.3% in 1999 to $984,000 from $297,000 in 1998, which had increased from
$133,000 in 1997. Additionally, normal operating expenses have increased in
categories such as telephone and communications, postage, courier, travel,
training, insurance, and deposit insurance, largely resulting from expansion.
The efficiency ratio represents non-interest expense (excluding the
amortization of intangible assets) as a percentage of the sum of FTE net
interest income and non-interest income; and is a measure of cost to generate a
dollar of revenue. The efficiency ratio improved in 1999 to 67% from 80% in 1998
and also in 1998 from 90%
24
<PAGE> 25
in 1997. This steady improvement has been achieved through top line earnings
growth and cost efficiencies realized from mergers.
Income Taxes. For six years, Vail Banks has utilized a net operating
loss ("NOL") carryforward obtained from a 1993 merger. Under GAAP requirements,
net income includes an equivalent expense that would be paid for taxation. A
federal taxation rate of approximately 34% is used for this purpose. The taxes
saved by use of the NOL carryforward before 1999 have been recorded directly to
additional paid-in capital, resulting in a reduction in reported earnings which
is offset by an increase to additional paid-in capital. In 1999, the benefit of
the NOL carryforward was realized through a reduction in taxable earnings offset
by an adjustment to the deferred tax asset account.
Income tax expense as a percentage of pre-tax income was 38.5% for 1999
compared with 32.8% and 37.8% in 1998 and 1997, respectively. Certain of the
acquisition related charges recorded in all three years were not deductible for
income tax purposes, affecting the effective tax rates. Factoring out this
amortization for 1999, 1998, and 1997, the effective tax in each period would
have been 34.2%, 29.7%, and 32.2%, respectively. The variation in effective tax
rates during these periods was largely precipitated by the mergers closed since
1996. A reconciliation of income tax expense to the amount computed by applying
the statutory federal income tax rate to pre-tax income is provided in note 10
of Notes to Consolidated Financial Statements.
FINANCIAL CONDITION
Loan Portfolio Composition. The following table sets forth the
composition of Vail Banks' loan portfolio by type of loan at the dates
indicated. Management believes that the balance sheet information as of the
dates indicated should be read in conjunction with the average balance
information in the tables above under "Net Interest Income." Vail Banks has
followed a policy to manage the loan portfolio composition to hedge risks in
specific markets by diversifying the loan portfolio. However, Vail Banks does
have a concentration of loans in the Commercial and Industrial and Real
Estate--Construction categories. As a result of seasonal trends in the retail,
service and real estate markets, balances of commercial loans may fluctuate
significantly. The Independent merger initially increased the mix of loans in
the Consumer category. This initial change in loan type mix, however, was only
temporary as increased lending capacity was utilized across all markets and loan
types. The Telluride merger shifted the mix back toward Commercial and
Industrial and Real Estate- Construction. Therefore, the data below is not
necessarily indicative of longer-term trends within a particular category.
LOANS OUTSTANDING AT DECEMBER 31,
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
(dollars in thousands) AMOUNT % Amount % Amount % Amount % Amount %
-------- --- ------- --- ------- --- ------- --- ------ ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and industrial $165,373 49% 130,677 48% 77,801 50% 46,850 44% 33,995 43%
Real estate-construction 80,959 24 55,642 21 25,163 16 23,852 22 19,524 25
Real estate-mortgage 59,898 18 51,000 19 31,618 21 31,815 30 21,479 27
Consumer 30,505 9 31,872 12 20,331 13 4,269 4 3,689 5
-------- --- ------- --- ------- --- ------- --- ------ ---
Total $336,735 100% 269,191 100% 154,913 100% 106,786 100% 78,687 100%
======== === ======= === ======= === ======= === ====== ===
</TABLE>
At December 31, 1999, loans were $336.7 million, which was an increase
of $67.5 million, or 25.1%, over $269.2 million at December 31, 1998. All
categories of loans except for Consumer increased over this period, primarily
due to internal loan growth precipitated by a healthy local economy and active
and successful solicitation by banking officers. Loans increased in 1998 by
$114.3 million, or 73.8%, over $154.9 million in
25
<PAGE> 26
1997. This growth was the result of the Independent merger ($17.2 million in
loans), the Telluride merger ($81.8 million in loans), as well as core business
growth.
Commercial and Industrial loans principally include loans to service,
real estate and retail businesses and farmers. These loans are primarily secured
by real estate and operating business assets and are made on the basis of the
financial strength and repayment ability of the borrowers as well as the
collateral securing the loans.
Real Estate--Construction loans principally include short-term loans to
fund the construction of buildings and residences and/or to purchase land for
planned and near-term commercial or residential development. These loans are
primarily non-revolving lines of credit and secured by real estate, typically
well margined with a first security lien.
Real Estate--Mortgage loans principally include short-term financing
for existing one-to-four family residences. The majority of these loans have
maturities of less than five years. These loans are secured by the subject real
estate, typically well margined with a first lien position.
Consumer loans to individuals principally include one-to-five year
loans for consumer items, such as automobiles, snowmobiles, motor homes and
other goods. These loans are typically secured, at minimum, by the value of the
items being financed.
Banking officers are assigned various levels of loan approval authority
based upon their respective levels of experience and expertise. Loan
relationships exceeding $1.0 million are evaluated and acted upon by the
Directors' Loan Committee, which meets weekly, and are reported to the Board of
Directors. Vail Banks' strategy for approving or disapproving loans is to follow
a conservative loan policy and underwriting practices which include: (i)
granting loans on a sound and collectible basis; (ii) investing funds for the
benefit of shareholders and the protection of depositors; (iii) serving the
needs of the community and Vail Banks' general market area while obtaining a
balance between maximum yield and minimum risk; (iv) ensuring that primary and
secondary sources of repayment are adequate in relation to the amount of the
loan; (v) developing and maintaining diversification in the loan portfolio as a
whole and of the loans within each loan category; and (vi) ensuring that each
loan is properly documented and, if appropriate, insurance coverage is adequate.
Vail Banks' loan review and compliance personnel interact daily with commercial
and consumer lenders to identify potential underwriting or technical exception
variances. In addition, Vail Banks has placed increased emphasis on early
identification of problem loans in an effort to aggressively seek resolution of
the situations. Management believes that adherence to conservative loan policy
guidelines has contributed to Vail Banks' below average level of loan losses
compared to its industry peer group.
Loan Maturities. The following table presents loans by maturity in each
major category at December 31, 1999. Actual maturities may differ from the
contractual repricing maturities shown below as a result of renewals and
prepayments. Loan renewals are evaluated in the same manner as new credit
applications.
LOAN MATURITIES AT DECEMBER 31, 1999
<TABLE>
<CAPTION>
Within 1-5 Over 5
(in thousands) 1 Year Years Years Total
-------- ------- ------ -------
<S> <C> <C> <C> <C>
Commercial and industrial $ 58,184 72,854 34,335 165,373
Real estate-construction 53,472 26,848 639 80,959
Real estate-mortgage 11,411 34,426 14,061 59,898
Consumer 7,974 19,833 2,698 30,505
-------- ------- ------ -------
Total $131,041 153,961 51,733 336,735
======== ======= ====== =======
</TABLE>
Of the loans with maturities over one year, $89.8 million had floating interest
rates and the remainder had fixed interest rates.
26
<PAGE> 27
Analysis of Allowance for Loan Losses. The allowance for loan losses
represents management's recognition of the risks of extending credit and its
evaluation of the loan portfolio. The allowance is maintained at a level
considered adequate to provide for anticipated loan losses based on management's
assessment of various factors affecting the loan portfolio, including a review
of problem loans, business conditions, historical loss experience, evaluation of
the quality of the underlying collateral, and holding and disposal costs. The
allowance is increased by additional charges to operating income and reduced by
loans charged off, net of recoveries.
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
(dollars in thousands) 1999 1998 1997 1996 1995
------ ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Allowance at beginning of the year $2,590 1,364 823 620 361
Charge-offs
Commercial and industrial 86 23 6 83 31
Real estate-construction -- -- -- -- --
Real estate-mortgage 50 2 -- -- --
Consumer 245 143 52 39 7
------ ----- ----- ----- -----
Total charge-offs 381 168 58 122 38
Recoveries
Commercial and industrial 58 22 17 167 54
Real estate-construction -- -- -- -- --
Real estate-mortgage -- -- -- -- 20
Consumer 17 26 7 4 3
------ ----- ----- ----- -----
Total recoveries 75 48 24 171 77
------ ----- ----- ----- -----
Net charge-offs (recoveries) 306 120 34 (49) (39)
Provision for loan losses 455 -- 232 154 40
Allowance acquired through acquisitions -- 1,346 343 -- 180
------ ----- ----- ----- -----
Allowance at the end of the year $2,739 2,590 1,364 823 620
====== ===== ===== ===== =====
Net charge-offs (recoveries) to
average loans 0.10% 0.07% 0.03% (0.05%) (0.07%)
====== ===== ===== ===== =====
Provision for loan losses to
average loans 0.15 0.00 0.20 0.17 0.08
====== ===== ===== ===== =====
Allowance for loan losses to
total loans at year-end 0.81 0.96 0.88 0.77 0.79
====== ===== ===== ===== =====
</TABLE>
Net charge-offs during 1999 totaled $306,000, or 0.10% of average
loans, compared to $120,000 or 0.07% of average loans in 1998. Net charge-offs
during 1997 totaled $34,000, or 0.03% of average loans, compared to net
recoveries of $49,000, or 0.05% of average loans in 1996.
Vail Banks' lending personnel are responsible for ongoing reviews of
the quality of the loan portfolio. Additionally, Vail Banks has engaged an
external bank auditing firm to conduct loan reviews on a periodic basis. A list
containing any potential problem loans is updated and reviewed by management and
the Board of Directors monthly. These reviews assist in the identification of
potential and probable losses, and also in the determination of an appropriate
level of the allowance for loan losses. The allowance for loan losses is based
primarily on management's estimates of possible loan losses from the foregoing
processes and historical experience. These estimates involve ongoing judgments
and may be adjusted over time depending on economic conditions, changing
historical experience and changing mix of the loan portfolio between the
different types of loans.
State and federal regulatory agencies, as an integral part of their
examination process, review Vail Banks' loans and its allowance for loan losses.
Management believes that Vail Banks' allowance for loan losses
27
<PAGE> 28
is adequate to cover anticipated losses. There can be no assurance, however,
that management will not need to increase the allowance for loan losses or that
regulators, when reviewing Vail Banks' loan portfolio in the future, will not
require Vail Banks to increase such allowance, either of which could adversely
affect Vail Banks' earnings. Further, there can be no assurance that Vail Banks'
actual loan losses will not exceed its allowance for loan losses.
In order to comply with certain regulatory requirements, management has
prepared the following allocation of Vail Banks' allowance for loan losses among
various categories of the loan portfolio for each of the years in the five-year
period ended December 31, 1999. In management's opinion, such allocation has, at
best, a limited utility. It is based on management's assessment as of a given
point in time of the risk characteristics for each of the component parts of the
total loan portfolio and is subject to changes as and when the risk factors of
each such component part change. Such allocation is not indicative of either the
specific amounts or the loan categories in which future charge-offs may be
taken, nor should it be taken as an indicator of future loss trends. In
addition, by presenting such allocation, management does not mean to imply that
the allocation is exact or that the allowance has been precisely determined from
such allocation.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
Amount Loans by Type to Total Loans
(dollars in thousands) 1999 1998 1997 1996 1995 1999 1998 1997 1996 1995
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and industrial $ 784 992 110 41 -- 49% 48% 50% 44% 43%
Real estate-construction 513 411 334 675 351 24 21 16 22 25
Real estate-mortgage 642 584 55 68 84 18 19 21 30 27
Consumer 380 292 141 32 154 9 12 13 4 5
Unallocated 420 311 724 7 31
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total $2,739 2,590 1,364 823 620 100% 100% 100% 100% 100%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
Non-performing Assets. Non-performing assets consist of nonaccrual
loans, restructured loans and foreclosed properties. When, in the opinion of
management, a reasonable doubt exists as to the collectibility of interest,
regardless of the delinquency status of the loan, the accrual of interest income
is discontinued and interest accrued during the current year is reversed through
a charge to current year's earnings. While the loan is on nonaccrual status,
interest income is recognized only upon receipt and then only if, in the
judgment of management, there is no reasonable doubt as to the collectibility of
the principal balance. Loans 90 days or more delinquent generally are changed to
nonaccrual status unless the loan is in the process of collection and management
determines that full collection of principal and accrued interest is probable.
Restructured loans are those for which concessions, including reduction
of interest rate below a rate otherwise available to the borrower or the
deferral of interest or principal, have been granted due to the borrower's
weakened financial condition. Interest on restructured loans is accrued at the
restructured rates when it is anticipated that no loss of original principal
will occur.
28
<PAGE> 29
The following table sets forth information concerning the
non-performing and risk assets of Vail Banks as of the dates indicated.
ASSET QUALITY AT DECEMBER 31,
<TABLE>
<CAPTION>
(dollars in thousands) 1999 1998 1997 1996 1995
------ ----- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $1,843 322 136 -- 353
Restructured loans -- -- -- -- --
------ ----- ---- ---- ----
Total non-performing loans 1,843 322 136 -- 353
Foreclosed properties 287 412 -- -- 128
------ ----- ---- ---- ----
Total non-performing assets 2,130 734 136 -- 481
Loans 90 days or more past due and accruing 11 1,061 78 65 3
------ ----- ---- ---- ----
Total risk assets $2,141 1,795 214 65 484
====== ===== ==== ==== ====
Non-performing loans to total loans 0.55% 0.12% 0.09% 0.00% 0.45%
====== ===== ==== ==== ====
Non-performing assets to total loans
plus foreclosed properties 0.63 0.27 0.09 0.00 0.61
====== ===== ==== ==== ====
Non-performing assets to total assets 0.46 0.17 0.06 0.00 0.35
====== ===== ==== ==== ====
Risk assets to total loans plus
foreclosed properties 0.64 0.67 0.14 0.06 0.61
====== ===== ==== ==== ====
</TABLE>
Non-performing assets as a percentage of total loans plus foreclosed
properties at December 31, 1999 was 0.63% compared to 0.27%, and 0.09%, at
December 31, 1998, and 1997, respectively. The $1.8 million in nonaccrual loans
at December 31, 1999, is comprised primarily of two loans, both of which were in
Telluride's loan portfolio at the time of acquisition. Management believes Vail
Banks is adequately collateralized to recover the majority of the balance of
these nonaccrual loans. Vail Banks has reviewed and analyzed each of these loans
and has implemented strategies to resolve the issues with the few loans that
caused these measures to rise. Management generally obtains and maintains
appraisals on real estate collateral. Management is not aware of any adverse
trends relating to Vail Banks' loan portfolio.
At December 31, 1999, there were no loans excluded from non-performing
loans set forth above where known information about possible credit problems of
borrowers causes management to have doubts as to the ability of such borrowers
to comply with the present loan repayment terms and which may result in such
loans becoming non-performing.
Investments. Vail Banks' investment policy is designed primarily to
ensure liquidity and to meet pledging requirements and secondarily to provide
acceptable investment income. Management's focus is on maintaining a
high-quality investment portfolio oriented toward U.S. Treasury and U.S.
Government agency securities. None of the securities in the investment portfolio
is classified as "high-risk" as defined by the Federal Financial Institutions
Examinations Council. The determination of the amount and maturity of securities
purchased is a function of liquidity and income projections based on the
existing, and expected, balance sheet and interest rate forecasts.
Vail Banks accounts for investment securities according to Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investments in
Debt and Equity Securities. At the date of purchase, Vail Banks
29
<PAGE> 30
is required to classify debt and equity securities into one of three categories:
held to maturity, trading, or available for sale. Investments in debt securities
are classified as held to maturity and measured at amortized cost in the
financial statements only if management has the positive intent and ability to
hold those securities to maturity. Securities that are bought and held
principally for the purpose of selling them in the near term are classified as
trading and measured at fair value in the statements with unrealized gains and
losses included in earnings. Since its inception, Vail Banks has not had any
trading account activities. Investments not classified as either held to
maturity or trading are classified as available for sale and measured at fair
value in the financial statements with unrealized gains and losses reported, net
of tax, in a separate component of other comprehensive income until realized.
The following tables set forth information regarding the investment composition
of Vail Banks as of the dates indicated.
INVESTMENT SECURITIES AVAILABLE FOR SALE AT DECEMBER 31,
<TABLE>
<CAPTION>
1999 1998 1997
(dollars in thousands) Amount % Amount % Amount %
------- --- ------ --- ------ ---
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ 1,804 6% 8,491 26% 1,865 19%
Government agencies 13,418 43 13,729 42 3,843 40
State and municipal 6,055 19 7,952 24 2,978 31
Mortgage-backed securities 7,806 25 812 2 -- 0
Federal Home Loan Bank stock 1,387 4 1,090 3 500 5
Federal Reserve stock 793 2 764 2 371 4
Other equity securities 183 1 184 1 50 1
------- --- ------ --- ----- ---
Total available for sale $31,446 100% 33,022 100% 9,607 100%
======= === ====== === ===== ===
</TABLE>
INVESTMENT SECURITIES HELD TO MATURITY AT DECEMBER 31,
<TABLE>
<CAPTION>
1999 1998 1997
(dollars in thousands) Amount % Amount % Amount %
------ --- ------ --- ------ ---
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury $3,994 75% 5,986 77% 7,960 79%
State and municipal -- 0 50 1 85 1
Mortgage-backed securities 1,351 25 1,677 22 2,080 20
------ --- ----- --- ------ ---
Total held to maturity $5,345 100% 7,713 100% 10,125 100%
====== === ===== === ====== ===
</TABLE>
30
<PAGE> 31
Investment Maturities and Yield. The following tables set forth the
estimated market value and approximate yield of the securities in the investment
portfolio by type and maturity at December 31, 1999.
MATURITIES FOR AVAILABLE FOR SALE INVESTMENTS AT DECEMBER 31, 1999
<TABLE>
<CAPTION>
Within 1-5 5-10 Over 10
(dollars in thousands) 1 Year Years Years Years Total
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
-------- ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ 1,503 4.77% 301 5.89% -- 0.00% -- 0.00% 1,804 4.96%
Government agencies 3,455 5.10 7,497 5.36 1,911 6.19 555 5.40 13,418 5.41
State and municipal 2,086 4.04 2,937 4.07 746 5.34 286 4.61 6,055 4.25
Mortgage-backed securities 17 6.61 217 6.76 55 6.69 7,517 6.12 7,806 6.14
Equity securities (1) -- -- -- 2,363 2,363
-------- ---- ------ ---- ----- ---- ------ ---- ------ -----
Total and weighted average yield $ 7,061 4.72% 10,952 5.06% 2,712 5.97% 10,721 6.02% 31,446 5.35%
======== ==== ====== ==== ===== ==== ====== ==== ====== =====
</TABLE>
(1) Equity securities do not have stated maturity dates.
MATURITIES FOR HELD TO MATURITY INVESTMENTS AT DECEMBER 31, 1999
<TABLE>
<CAPTION>
Within 1-5 5-10 Over 10
(dollars in thousands) 1 Year Years Years Years Total
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
-------- ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ -- 0.00% 3,994 5.40% -- 0.00% -- 0.00% 3,994 5.40%
Mortgage-backed securities -- 0.00 -- 0.00 381 6.75 970 7.23 1,351 7.10
-------- ---- ------ ---- ----- ---- ------ ---- ------ -----
Total and weighted average yield $ -- 0.00% 3,994 5.40% 381 6.75% 970 7.23% 5,345 5.83%
======== ==== ====== ==== ===== ==== ====== ==== ====== =====
</TABLE>
Deposits. Vail Banks' primary source of funds has historically been
in-market customer deposits. Deposit products are concentrated in business and
personal checking accounts, including interest bearing and non-interest bearing
accounts. Generally, deposits are short-term in nature with approximately 79% of
deposits having a committed term less than three months and approximately 96%
having a committed term of less than one year. Vail Banks' resort locations
experience a seasonality of deposits; however, increases in deposits in
non-resort-oriented markets due to recent mergers have somewhat mitigated such
seasonality.
Total deposits were $372.7 million at December 31, 1999, a decrease of
$4.8 million, or 1.3%, from $377.5 million at December 31, 1998. Management
attributes this decline in deposits to several factors, including: the
intentional reduction of high-cost public certificates of deposit, cash
withdrawals at year-end related to the public's Year 2000 liquidity concerns,
and the general movement from bank deposits to stock market investments by the
consumer. In 1998 deposits increased by $171.4 million, or 83.1% from $206.2
million, at December 31, 1997. The increase in 1998 was primarily attributable
to the Telluride merger in which deposits of $119.9 million were obtained.
Deposits are relatively concentrated in lower cost transaction accounts with 23%
in non-interest bearing checking and 17% in interest bearing checking at
December 31, 1999. Savings deposits made up 8% and money market deposits made up
28% of deposits at year-end.
31
<PAGE> 32
The following table sets forth the composition of Vail Banks' deposits by
type at December 31, 1999 and 1998.
DEPOSIT COMPOSITION AT DECEMBER 31,
<TABLE>
<CAPTION>
1999 1998 1997
(dollars in thousands) AMOUNT % Amount % Amount %
-------- --- ------- --- ------- ---
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing checking $ 86,991 23% 91,510 24% 56,929 28%
Interest bearing checking 64,753 17 61,050 16 64,592 31
Money market 102,784 28 90,839 24 30,187 15
Savings 31,451 9 42,165 11 13,537 6
Certificates of deposit 86,763 23 92,008 25 40,970 20
-------- --- ------- --- ------- ---
Total $372,742 100% 377,572 100% 206,215 100%
======== === ======= === ======= ===
</TABLE>
The following table sets forth the amount and maturity of certificates of
deposit that had balances equal to or greater than $100,000 at December 31,
1999 and 1998.
MATURITIES OF CERTIFICATES OF DEPOSIT EQUAL TO OR GREATER THAN $100,000 AT
DECEMBER 31,
<TABLE>
<CAPTION>
(in thousands) 1999 1998
------- ------
<S> <C> <C>
3 months or less $ 9,290 22,907
3 - 6 months 6,825 9,036
6 - 12 months 10,424 7,888
Over 12 months 1,978 4,641
------- ------
Total $28,517 44,472
======= ======
</TABLE>
Vail Banks' secondary sources of funding include federal funds purchased
lines and Federal Home Loan Bank ("FHLB") borrowings. At December 31, 1999
federal funds purchased totaled $11.1 million and FHLB borrowings totaled $19.0
million. While the federal funds purchased were overnight borrowings, the FHLB
borrowings had maturities between one and five months.
LIQUIDITY AND INTEREST RATE SENSITIVITY
Sources of Liquidity. Liquidity is a measure of Vail Banks' ability to
meet its customers' present and future deposit withdrawals and/or increased loan
demand without unduly penalizing earnings. Interest rate sensitivity involves
the relationship between rate sensitive assets and liabilities and is an
indication of the probable effects of interest rate movements on Vail Banks' net
interest income. Vail Banks manages both its liquidity and interest sensitivity
by projecting credit demand and other financial needs and then maintaining
sufficient funding sources and assets readily convertible into cash to meet
these requirements.
Vail Banks has provided for its liquidity needs by maintaining adequate
cash balances, through growth in core deposits, maturing loans and investments
in its securities portfolio and by maintaining various short-term borrowing
sources. Vail Banks generally does not accept brokered deposits. Management
believes that maturing investment securities and unused borrowing sources will
be adequate to meet the liquidity needs for the foreseeable future.
Asset and Liability Management. The liquidity position of Vail Banks is
monitored by the Asset/Liability Committee of the Board of Directors. A
principal function of asset/liability management is to coordinate the levels of
interest-sensitive assets and liabilities to minimize net interest income
fluctuations in times of fluctuating market interest rates. Interest-sensitive
assets and liabilities are those that are subject to repricing in
32
<PAGE> 33
the near term, including both variable rate instruments and those fixed rate
instruments which are approaching maturity. Changes in net yield on
interest-sensitive assets occur when interest rates on those assets, such as
loans and investment securities, change in a different time period from that of
the interest rates on liabilities, such as deposits. Changes in net yield on
interest-sensitive assets result from changes in the mix and volumes of earning
assets and interest-bearing liabilities. These differences, or "gaps," provide
an indication of the extent that net interest income may be affected by future
changes in interest rates.
A positive gap exists when interest-sensitive assets exceed
interest-sensitive liabilities and indicates that a greater volume of assets
than liabilities will reprice during a given time period. With a positive gap,
rising rate environments may enhance earnings, while a declining rate
environment may depress earnings. Conversely, a negative gap exists when
interest-sensitive liabilities exceed interest-sensitive assets. With a negative
gap, rising rate environments may depress earnings, while declining rate
environments may enhance earnings.
The following table sets forth the interest rate sensitivity of Vail
Banks' assets and liabilities at December 31, 1999, and sets forth the repricing
dates of Vail Banks' interest-earning assets and interest-bearing liabilities as
of that date, as well as Vail Banks' interest rate sensitivity gap percentages
for the periods presented. The table is based on assumptions as to when assets
and liabilities will reprice in a changing interest rate environment, and since
such assumptions can be no more than estimates, certain assets and liabilities
indicated as maturing or otherwise repricing within a stated period may, in
fact, mature or reprice at different times and at different volumes than those
estimated. Also, the renewal or repricing of certain assets and liabilities can
be discretionary and subject to competitive and other pressures. Therefore, the
following table does not and cannot necessarily indicate the actual future
impact of general interest rate movements on Vail Banks' net interest income.
33
<PAGE> 34
STATIC INTEREST RATE SENSITIVITY AT DECEMBER 31, 1999
<TABLE>
<CAPTION>
(dollars in thousands) Maturing or Repricing
-----------------------------------------------------------------------------
Non-Sensitive
1 - 90 91 Days 1 Year and Over
Days to 1 Year to 5 Years 5 Years Total
-------- --------- ---------- ------------- -------
<S> <C> <C> <C> <C> <C>
Assets
Investment securities $ 2,112 5,657 14,474 14,548 36,791
Loans 175,145 29,917 104,578 27,095 336,735
Non-earning assets 91,436 91,436
-------- ------- ------- ------- -------
Total assets 177,257 35,574 119,052 133,079 464,962
Liabilities and shareholders' equity
Interest-bearing deposits:
Interest bearing checking* 32,377 19,426 12,950 64,753
Money market and other savings* 67,118 40,271 26,846 134,235
Certificates of deposit 25,415 49,744 11,588 16 86,763
-------- ------- ------- ------- -------
Total interest bearing deposits 124,910 109,441 51,384 16 285,751
Federal funds purchased and other
short-term borrowings 24,060 6,000 30,060
Non-interest bearing liabilities 89,769 89,769
Minority interest 655 655
Shareholders' equity 58,727 58,727
-------- ------- ------- ------- -------
Total liabilities and equity 148,970 115,441 51,384 149,167 464,962
Interest sensitivity gap $ 28,287 (79,867) 67,668 (16,088)
======== ======= ======= =======
Cumulative interest sensitivity gap $ 28,287 (51,580) 16,088
======== ======= =======
Cumulative gap as a percentage
of total assets 6.1% (11.1)% 3.5%
======== ======= =======
</TABLE>
*Vail Banks' experience with interest bearing checking accounts, money market
and savings deposits has been that, although these deposits are subject to
immediate withdrawal or repricing, a portion of the balances has remained
relatively constant in periods of both rising and falling rates. Therefore, a
portion of these deposits is included in all categories except for the
"Non-Sensitive and Over 5 Years" category.
34
<PAGE> 35
CAPITAL RESOURCES
On December 10, 1998 Vail Banks sold 1,680,000 shares of common stock
in the Offering, which generated $17.6 million in new equity. At the same time,
shareholders' equity was reduced by $467,000 due to the early conversion payment
upon the required conversion of preferred stock to common stock.
Shareholders' equity at December 31, 1999 increased to $58.7 million,
or 8.0%, from $54.4 million at December 31, 1998. Shareholders' equity increased
$36.5 million, or 204.3%, from $17.9 million at December 31, 1997. The increase
in 1999 was solely due to the retention of current period earnings. In contrast,
the increase in 1998 was due to the Common Stock issued in connection with the
Independent merger, Telluride merger, a private offering of $2.0 million in
Common Stock, the stock issued in the Offering, and, to a lesser extent, the
retention of current period earnings. After netting the effects of the tax loss
carryforward and the "equivalent taxation" entry, the total increase in
shareholders' equity due to retention of earnings was $3.3 million at December
31, 1998, up $2.6 million from $748,000 at December 31, 1997.
Vail Banks is subject to various regulatory capital requirements
administered by the various governmental banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on Vail Banks' financial condition. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, Vail Banks
must meet specific guidelines that involve quantitative measures of assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. Vail Banks' capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the bank to maintain minimum amounts and ratios of Total and
Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets.
See "Supervision and Regulation" in Item 1 for explanations of these terms and
requirements.
Vail Banks currently maintains, and intends to continue to maintain,
Tier 1 capital, Total capital and leverage (Tier 1 capital to average total
assets) ratios in excess of the minimum for a "well capitalized" rating.
YEAR 2000 COMPLIANCE
Vail Banks did not experience any material disruptions in its
operations or activities as a result of the so-called "Year 2000" problem. In
addition, Vail Banks did not incur material expenses in correcting perceived or
suspected Year 2000 problems. Furthermore, Vail Banks is not aware that any of
its suppliers or customers have experienced any material disruptions in their
operations or activities due to Year 2000 problems. Vail Banks does not expect
to encounter any such problems in the foreseeable future, although it continues
to monitor its computer operations for signs or indications of such problems.
It is possible, however, that Year 2000 problems could still disrupt
Vail Banks' operations and the systems of other companies upon which their
systems rely. If Vail Banks' systems or the systems of its customers, product
vendors, utility vendors, and suppliers experience unforeseen Year 2000 problems
in the future, it may negatively impact Vail Banks' systems, operations and
financial performance.
EFFECT OF INFLATION AND CHANGING PRICES
The banking industry is unique in that substantially all of the assets
and liabilities are of a monetary nature. As a result, interest rates have a
more profound effect on a bank's performance than does inflation. Although there
is not always a direct relationship between the movement in the prices of goods
and services and changes in interest rates, increases in inflation generally
lead to increases in interest rates. However, in short periods of time interest
rates may not move in the same direction or magnitude as inflation.
35
<PAGE> 36
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 ("the Statement') establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. The Statement requires that changes
in the derivative's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. Special accounting for qualifying
hedges allows gains and losses from derivatives to offset related results on the
hedged item in the income statement, and requires that a company formally
document, designate and assess the effectiveness of transactions for which hedge
accounting is applied.
Initially, the Statement was to be effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. In June 1999, the FASB amended SFAS
No. 133, deferring the effective date by one year. It may be implemented earlier
provided adoption occurs as of the beginning of any fiscal quarter after
issuance. The Statement may not be applied retroactively. Vail Banks expects to
adopt the Statement in the first quarter of 2001. Based upon information
available, the impact of adoption is not expected to be material to the
Consolidated Financial Statements. Nevertheless, the adoption of the Statement
could increase the volatility of reported earnings and shareholders' equity in
future periods.
ITEM 7. FINANCIAL STATEMENTS.
The response to this item is included in Part IV, Item 13 of this
Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On January 15, 1999, the Audit Committee of the Board of Directors of
Vail Banks, Inc. (the "Company") approved the dismissal of Fortner Bayens
Levkulich & Co., P.C. and the hiring of KPMG LLP. The decision to dismiss
Fortner Bayens Levkulich & Co., P.C. by the Audit Committee was based on the
need to hire a larger accounting firm to meet the Company's needs after the
public offering in December 1998.
The report of Fortner, Bayens, Levkulich & Co., P.C. on the Company's
financial statements for the fiscal year ended on December 31, 1997 did not
contain an adverse opinion or a disclaimer of opinion and was not qualified or
modified as to uncertainty, audit scope or accounting principles.
In connection with the audit of the Company's financial statements for
the year ended December 31, 1997, and in the subsequent interim period, there
were no disagreements with Fortner, Bayens, Levkulich & Co., P.C. on any matters
of accounting principles or practices, financial statement disclosure or
auditing scope and procedures which, if not resolved to the satisfaction of
Fortner, Bayens, Levkulich & Co., P.C., would have caused Fortner, Bayens,
Levkulich & Co., P.C. to make reference to the matter in their report.
During the fiscal year ended on December 31, 1997 and through January
15, 1999, the Company did not consult with KPMG LLP on matters (i) regarding the
application of accounting principles to a specified transaction or the type of
audit opinion that might be rendered on the Company's financial statements, or
(ii) which concerned the subject matter of a disagreement or event identified in
response to paragraph (a) (1) (iv) of Item 304 of Regulation S-B with the former
auditor.
36
<PAGE> 37
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
The information contained under the headings "Information About Nominees
For Director and Continuing Directors" and "Compliance with Section 16(a) of the
Exchange Act" in the definitive Proxy Statement to be used in connection with
the solicitation of proxies for Vail Banks' annual meeting of shareholders to be
held on May 16, 2000, to be filed with the Securities and Exchange Commission
("SEC"), is incorporated herein by reference. Information regarding executive
officers is included in "Executive Officers of Vail Banks" in Item 1 of this
Form 10-KSB.
ITEM 10. EXECUTIVE COMPENSATION.
The information contained under the heading "Executive Compensation" in
the definitive proxy statement to be used in connection with the solicitation of
proxies for Vail Banks' annual meeting of shareholders to be held on May 16,
2000, to be filed with the SEC, is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information contained under the heading "Beneficial Ownership of
Securities " in the definitive proxy statement to be used in connection with the
solicitation of proxies for Vail Banks' annual meeting of shareholders to be
held on May 16, 2000, to be filed with the SEC, is incorporated herein by
reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information contained under the heading "Certain Relationships and
Related Transactions" in the definitive Proxy Statement to be used in connection
with the solicitation of proxies for all Vail Banks' annual meeting of
shareholders to be held on May 16, 2000, to be filed with the SEC, is
incorporated herein by reference.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
(a) FINANCIAL STATEMENTS.
The following financial statements and notes thereto of Vail Banks begin
on page F-1 of this report.
Independent Auditors' Reports
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Income for the years ended December 31,
1999, 1998 and 1997
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997
Notes to Consolidated Financial Statements as of December 31, 1999 and
1998 and for the years ended December 31, 1999, 1998, and 1997.
37
<PAGE> 38
EXHIBITS
The following exhibits are required to be filed with this Report on
10-KSB by Item 601 of Regulation S-B.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
2.1 Merger Agreement and Plan of Reorganization by and between Vail Banks, Inc. and
Telluride Bancorp, Ltd., dated April 16, 1998, as amended*
2.2 Merger Agreement and Plan of Reorganization by and between Vail Banks, Inc.,
WestStar Bank, Independent Bankshares, Inc., and Glenwood Independent Bank,
dated March 10, 1998*
3.1 Amended and Restated Articles of Incorporation of the Registrant*
3.2 Amended and Restated Bylaws of the Registrant*
10.1 Stock Purchase Agreement by and between Vail Banks, Inc., WestStar Bank,
Cedaredge Financial Services, Inc., Western Community Bank, and certain
Company Shareholders, dated July 3, 1997*
10.2 Stock Incentive Plan, as amended*(1)
10.3 Change in Control Severance Payment Agreement by and between Vail Banks, Inc. and
E.B. Chester, dated November 19, 1999
10.4 Change in Control Severance Payment Agreement by and between Vail Banks, Inc. and
Lisa M. Dillon, dated November 19, 1999
10.5 Amended and Restated Stock Incentive Plan Restricted Stock Award Agreement by and
between Vail Banks, Inc. and Lisa M. Dillon, dated November 19, 1999
10.6 Amended and Restated Stock Incentive Plan Restricted Stock Award Agreement by and
between Vail Banks, Inc. and E.B. Chester, dated November 19, 1999
16.1 Letter of change of certifying accountant*
21.1 Subsidiaries of the Registrant
24.1 Power of Attorney (on signature page)
27.1 Financial Data Schedule
</TABLE>
- --------------------
(1) Management contract or compensatory plan required to be filed as an
exhibit.
* Incorporated by reference from the Registrant's Form SB-2, as amended,
Commission File No. 333-60347.
** Incorporated by reference from the Registrant's Form SB-2, Commission
File No. 333-74571.
(b) REPORTS ON FORM 8-K.
NO REPORTS ON FORM 8-K WERE FILED.
38
<PAGE> 39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-KSB
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
Town of Vail, State of Colorado, on the 27th day of March, 2000.
VAIL BANKS, INC.
(REGISTRANT)
By: /s/ Lisa M. Dillon
-----------------------------------
Title: Lisa M. Dillon, President and
Chief Executive Officer
POWER OF ATTORNEY AND SIGNATURES
KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints E.B. Chester, Jr. or Lisa M. Dillon and either of
them (with full power in each to act alone), as true and lawful
attorneys-in-fact, with full power of substitution, for him or her and in his or
her name, place and stead, in any and all capacities, to sign any amendments to
this Report on Form 10-KSB and to file the same, with all exhibits thereto and
other documents in connection therewith, with the SEC, hereby ratifying and
confirming all that said attorney-in-fact, or their substitute or substitutes,
may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1934, this Report on
Form 10-KSB has been signed by the following persons in the capacities indicated
on the 27th day of March, 2000.
39
<PAGE> 40
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------- -----
<S> <C>
/s/ E. B. Chester, Jr. Chairman
- -----------------------------------------
E.B. Chester, Jr.
/s/ Lisa M. Dillon President and Chief Executive Officer,
- ----------------------------------------- director (principal executive officer)
Lisa M. Dillon
/s/ Kay H. Chester Director
- -----------------------------------------
Kay H. Chester
/s/ Dennis R. Devor Director
- -----------------------------------------
Dennis R. Devor
/s/ James G. Flaum Director
- -----------------------------------------
James G. Flaum
/s/ S. David Gorsuch Director
- -----------------------------------------
S. David Gorsuch
/s/ James M. Griffin Director
- -----------------------------------------
James M. Griffin
/s/ Martin T. Hart Director
- -----------------------------------------
Martin T. Hart
/s/ Garner F. Hill II Director
- -----------------------------------------
Garner F. Hill II
/s/ Robert L. Knous, Jr. Director
- -----------------------------------------
Robert L. Knous, Jr.
/s/ Kent Myers Director
- -----------------------------------------
Kent Myers
/s/ Byron A. Rose Director
- -----------------------------------------
Byron A. Rose
/s/ Donald L. Vanderhoof Director
- -----------------------------------------
Donald L. Vanderhoof
/s/ E. William Wilto Director
- -----------------------------------------
E. William Wilto
</TABLE>
40
<PAGE> 41
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of
Vail Banks, Inc.:
We have audited the accompanying consolidated balance sheets of Vail Banks, Inc.
and subsidiary as of December 31, 1999 and 1998, and the related consolidated
statements of income, shareholders' equity and comprehensive income, and cash
flows for each of the years in the two-year period ended December 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Vail Banks, Inc. and
subsidiary at December 31, 1999 and 1998, and the results of their operations
and their cash flows for each of the years in the two-year period ended December
31, 1999 in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Denver, Colorado
February 25, 2000
F-1
<PAGE> 42
INDEPENDENT AUDITORS' REPORT
Board of Directors
Vail Banks, Inc.
Vail, Colorado
We have audited the accompanying consolidated statements of income,
stockholders' equity and comprehensive income, and cash flows of Vail Banks,
Inc. and Subsidiary for the year ended December 31, 1997. These financial
statements are the responsibility of Vail Banks' management. Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations of Vail
Banks, Inc. and Subsidiary and their cash flows for the year ended December 31,
1997 in conformity with generally accepted accounting principles.
/s/ FORTNER, BAYENS, LEVKULICH & CO., P.C.
Denver, Colorado
February 20, 1998
F-2
<PAGE> 43
VAIL BANKS, INC.
Consolidated Balance Sheets
December 31, 1999 and 1998
(In thousands, except share data)
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Cash and due from banks $ 29,971 28,469
Federal funds sold and other short-term investments -- 43,105
Investment securities, available for sale 31,446 33,022
Investment securities, held to maturity (market value of
$5,289 and $7,814 in 1999 and 1998, respectively) 5,345 7,713
Loans 336,735 269,191
Allowance for loan losses (2,739) (2,590)
--------- ---------
Net loans 333,996 266,601
--------- ---------
Premises and equipment, net 34,954 31,647
Interest receivable 2,724 2,425
Intangible assets 24,177 22,959
Other assets 2,349 3,182
--------- ---------
$ 464,962 439,123
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits:
Non-interest bearing $ 86,991 91,510
Interest bearing 285,751 286,062
--------- ---------
Total deposits 372,742 377,572
Short-term borrowings:
Federal funds purchased 11,060 --
FHLB advances 19,000 --
--------- ---------
Total short-term borrowings 30,060 --
Notes payable -- 1,114
Interest payable and other liabilities 2,778 5,439
--------- ---------
Total liabilities 405,580 384,125
--------- ---------
Minority interest 655 621
--------- ---------
Shareholders' equity
Preferred stock -- $1 par value; 2,250,000 shares authorized, no shares
issued and outstanding at December 31, 1999 and
1998, respectively -- --
Common stock -- $1 par value; 20,000,000 shares authorized,
6,069,370 and 6,040,608 shares issued and outstanding at
December 31, 1999 and 1998, respectively 6,069 6,041
Additional paid-in capital 46,747 46,772
Retained earnings 6,378 1,522
Accumulated other comprehensive income (loss), net of taxes (467) 42
--------- ---------
Total shareholders' equity 58,727 54,377
--------- ---------
$ 464,962 439,123
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 44
VAIL BANKS, INC.
Consolidated Statements of Income
Years ended December 31, 1999, 1998 and 1997
(In thousands, except share data)
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Interest income
Interest and fees on loans $ 32,076 18,787 12,570
Interest on investment securities 2,152 1,137 956
Interest on federal funds sold and other
short-term investments 854 1,459 496
---------- ---------- ----------
Total interest income 35,082 21,383 14,022
---------- ---------- ----------
Interest expense
Deposits 10,378 7,526 4,251
Short-term borrowings 476 31 127
Notes payable 14 111 123
Mandatorily convertible debentures -- 141 13
---------- ---------- ----------
Total interest expense 10,868 7,809 4,514
---------- ---------- ----------
Net interest income 24,214 13,574 9,508
Provision for loan losses 455 -- 232
---------- ---------- ----------
Net interest income after provision
for loan losses 23,759 13,574 9,276
Non-interest income
Deposit related 2,414 1,404 916
Other 1,556 984 357
---------- ---------- ----------
3,970 2,388 1,273
Non-interest expense
Salaries and employee benefits 9,929 6,954 5,086
Occupancy 2,174 1,626 1,325
Furniture and equipment 1,696 1,151 852
Amortization of intangible assets 984 297 133
Other 5,049 3,020 2,391
---------- ---------- ----------
19,832 13,048 9,787
---------- ---------- ----------
Income before income taxes 7,897 2,914 762
Income taxes 3,041 955 288
---------- ---------- ----------
Net income $ 4,856 1,959 474
========== ========== ==========
Net income $ 4,856 1,959 474
Preferred stock dividends -- 690 --
---------- ---------- ----------
Net income available to common shareholders $ 4,856 1,269 474
========== ========== ==========
Earnings per share - basic and diluted $ 0.80 0.47 0.23
========== ========== ==========
Average common shares
Basic 6,040,618 2,691,987 2,100,423
Diluted 6,091,635 3,361,560 2,153,653
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 45
VAIL BANKS, INC.
Consolidated Statements of Shareholders' Equity and Comprehensive Income
Years ended December 31, 1999, 1998 and 1997
(In thousands, except share data)
<TABLE>
<CAPTION>
SERIES A COMMON STOCK
PREFERRED STOCK MANDATORY $1 PAR VALUE
--------------------- CONVERTIBLE ---------------------
SHARES AMOUNT DEBENTURES SHARES AMOUNT
--------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 -- $ -- -- 1,782,510 $ 1,782
Issuance of common stock for services -- -- -- 13,580 14
Sale of common stock -- -- -- 454,890 455
Debentures assumed in acquisition -- -- 1,600 -- --
Issuance of preferred stock 34,258 2,960 -- -- --
Comprehensive income
Net income -- -- -- -- --
Net change in unrealized gains on investment
securities available for sale (net of taxes) -- -- -- -- --
--------- --------- --------- --------- ---------
Total comprehensive income -- -- -- -- --
Income tax benefit credited to shareholders' equity -- -- -- -- --
--------- --------- --------- --------- ---------
Balance at December 31, 1997 34,258 2,960 1,600 2,250,980 2,251
Issuance of common stock for services -- -- -- 34,840 35
8% dividends declared on preferred stock -- -- -- -- --
Issuance of common stock at $10 per share, less
selling expenses of $36 -- -- -- 204,540 204
Issuance of common stock in conjunction with acquisitions -- -- -- 1,227,683 1,228
Issuance of common stock in conjunction with initial public
offering at $12 per share less selling expenses of $2,571 -- -- -- 1,680,000 1,680
Conversion of preferred stock to common stock including
preferred stock dividend in conjunction with initial public
offering less conversion costs of $20 (34,258) (2,960) -- 342,565 343
Conversion of mandatorily convertible debentures to
common stock in conjunction with initial public offering -- -- (1,600) 300,000 300
Comprehensive income
Net income -- -- -- -- --
Net change in unrealized gains on investment
securities available for sale (net of taxes) -- -- -- -- --
--------- --------- --------- --------- ---------
Total comprehensive income -- -- -- -- --
Income tax benefit credited to shareholders' equity -- -- -- -- --
--------- --------- --------- --------- ---------
Balance at December 31, 1998 -- -- -- 6,040,608 6,041
Issuance of restricted common stock -- -- -- 28,762 28
Recognition of stock compensation on restricted stock -- -- -- -- --
Comprehensive income
Net income -- -- -- -- --
Net change in unrealized losses on investment
securities available for sale (net of taxes) -- -- -- -- --
--------- --------- --------- --------- ---------
Total comprehensive income -- -- -- -- --
--------- --------- --------- --------- ---------
Balance at December 31, 1999 -- $ -- -- 6,069,370 $ 6,069
========= ========= ========= ========= =========
<CAPTION>
ACCUMULATED
ADDITIONAL RETAINED OTHER
PAID-IN EARNINGS COMPREHENSIVE
CAPITAL (DEFICIT) INCOME TOTAL
---------- --------- ------------- ---------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 7,871 (221) (3) 9,429
Issuance of common stock for services 62 -- -- 76
Sale of common stock 2,571 -- -- 3,026
Debentures assumed in acquisition -- -- -- 1,600
Issuance of preferred stock -- -- -- 2,960
Comprehensive income
Net income -- 474 -- 474
Net change in unrealized gains on investment
securities available for sale (net of taxes) -- -- 29 29
--------- --------- --------- ---------
Total comprehensive income -- 474 29 503
Income tax benefit credited to shareholders' equity 274 -- -- 274
--------- --------- --------- ---------
Balance at December 31, 1997 10,778 253 26 17,868
Issuance of common stock for services 172 -- -- 207
8% dividends declared on preferred stock -- (243) -- (243)
Issuance of common stock at $10 per share, less
selling expenses of $36 1,806 -- -- 2,010
Issuance of common stock in conjunction with acquisitions 12,867 -- -- 14,095
Issuance of common stock in conjunction with initial public
offering at $12 per share less selling expenses of $2,571 15,909 -- -- 17,589
Conversion of preferred stock to common stock including
preferred stock dividend in conjunction with initial public
offering less conversion costs of $20 2,597 (447) -- (467)
Conversion of mandatorily convertible debentures to
common stock in conjunction with initial public offering 1,300 -- -- --
Comprehensive income
Net income -- 1,959 -- 1,959
Net change in unrealized gains on investment
securities available for sale (net of taxes) -- -- 16 16
--------- --------- --------- ---------
Total comprehensive income -- 1,959 16 1,975
Income tax benefit credited to shareholders' equity 1,343 -- -- 1,343
--------- --------- --------- ---------
Balance at December 31, 1998 46,772 1,522 42 54,377
Issuance of restricted common stock (28) -- -- --
Recognition of stock compensation on restricted stock 3 -- -- 3
Comprehensive income
Net income -- 4,856 -- 4,856
Net change in unrealized losses on investment
securities available for sale (net of taxes) -- -- (509) (509)
--------- --------- --------- ---------
Total comprehensive income -- 4,856 (509) 4,347
--------- --------- --------- ---------
Balance at December 31, 1999 46,747 6,378 (467) 58,727
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 46
VAIL BANKS, INC.
Consolidated Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997
(In thousands)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 4,856 1,959 474
Adjustments to reconcile net income to net cash provided from
operating activities, net of effects of purchase business combinations:
Amortization of intangible assets 984 297 133
Depreciation and amortization of premises and equipment 2,026 1,421 885
Provision for loan losses 455 -- 232
Recognition of stock compensation on restricted stock 3 -- --
Net amortization of premiums (accretion of discounts) on
investment securities 92 11 (82)
Deferred income tax expense 593 902 274
Changes in operating assets and liabilities:
Decrease (increase) in interest receivable (298) 119 (348)
Decrease (increase) in intangible and other assets (723) (903) 20
Increase (decrease) in interest payable and other liabilities (2,839) (1,406) 3,954
Other, net 34 (9) (11)
-------- -------- --------
Net cash provided by operating activities 5,183 2,391 5,531
-------- -------- --------
Cash flows from investing activities, net of effects of
purchase business combinations
Net decrease (increase) in federal funds sold 43,105 (12,867) (10,403)
Purchase of investment securities available for sale (16,869) (575) (238)
Proceeds from maturities of investment securities held to maturity 2,368 7,760 450
Proceeds from maturities of investment securities available for sale 17,516 2,412 4,610
Net increase in loans (67,819) (15,467) (13,943)
Purchase of premises and equipment (4,822) (5,252) (2,205)
Net cash received in (paid for) acquisitions 35,551 (8,259) (1,353)
-------- -------- --------
Net cash provided (used) by investing activities 9,030 (32,248) (23,082)
-------- -------- --------
Cash flows from financing activities, net of effects of
purchase business combinations
Net increase (decrease) in deposits (41,657) 24,058 19,857
Net increase in federal funds purchased 11,060 -- --
Net increase in FHLB advances 19,000 -- --
Net decrease in repurchase agreements -- (308) (1,339)
Proceeds from issuance of common stock -- 19,806 3,026
Cash paid in conversion of preferred stock to common stock -- (20) --
Dividends paid -- (690) --
Repayments of notes payable (1,114) (1,200) (4,765)
-------- -------- --------
Net cash provided (used) by financing activities (12,711) 41,646 16,779
-------- -------- --------
Net increase (decrease) in cash and due from banks 1,502 11,789 (772)
Cash and due from banks at beginning of year 28,469 16,680 17,452
-------- -------- --------
Cash and due from banks at end of year $ 29,971 28,469 16,680
======== ======== ========
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest $ 10,991 7,584 4,360
======== ======== ========
Income taxes $ 2,470 71 8
======== ======== ========
Noncash investing and financing transactions
Foreclosure of collateralized loans, net of reserve $ 306 -- --
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 47
VAIL BANKS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share data)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements include the
accounts of Vail Banks, Inc. (VBI) and its wholly owned
subsidiary, WestStar Bank (WestStar). WestStar and VBI own a
54.04% interest in Avon 56 Limited which is also included in the
accompanying consolidated financial statements. All entities are
collectively referred to as the Company. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
In 1993, VBI was formed as a bank holding company for WestStar and
is engaged in the management and operation of financial
institutions primarily in the western slope region of Colorado.
Colorado counties served by the Company include Summit, Eagle,
Delta, Garfield, Ouray, San Miguel and Montrose, as well as the
Denver Metropolitan area. The Company offers a full range of loan
and deposit products to local consumers and commercial businesses.
On December 10, 1998, the Company sold shares of its $1 par value
common stock in an initial public offering (the offering). In
conjunction with the offering, VBI issued 1,680,000 new shares at
$12 per share. Also in conjunction with the offering, the Company
acquired Telluride Bancorp, Ltd., which was merged into VBI, and
its two subsidiary banks, Bank of Telluride and Western Colorado
Bank, both of which are now operated as branches of WestStar.
(b) CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company
considers cash equivalents to represent cash and due from banks.
Cash equivalents include uninsured deposits in financial
institutions approximating $20,828 and $6,597 at December 31, 1999
and 1998, respectively, other than amounts on deposit at the
Federal Home Loan Bank of Topeka and the Federal Reserve Bank.
(c) INVESTMENT SECURITIES
Debt securities that the Company has the positive intent and
ability to hold to maturity are classified as held-to-maturity and
reported at cost, adjusted for amortization or accretion of
premiums or discounts. Other investment securities are classified
as available-for-sale and reported at fair value. Unrealized gains
and losses, net of the related tax effect, on available-for-sale
securities are reported as a separate component of shareholders'
equity, and the annual change of such gains and losses are
reported as other comprehensive income. Transfer of securities
between categories are recorded at fair value on the date of
transfer.
Realized gains and losses on the sale of investment securities are
determined using the specific identification method at the time of
sale or redemption at maturity. Discounts or premiums are accreted
or amortized using the level-yield method to the earlier of call
date or maturity of the related held-to-maturity security.
F-7
<PAGE> 48
VAIL BANKS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share data)
(d) LOANS AND INTEREST INCOME
Loans are reported net of unearned interest and unamortized
deferred fees and costs. Interest income on loans is accrued daily
on the principal balance outstanding, if such income is deemed
collectible. Generally, the Company places loans on nonaccrual
status when payments are more than 90 days past due or when
management believes it is probable that the Company will not
collect all of its outstanding principal. When placing a loan on
nonaccrual status, interest accrued to date is generally reversed
unless the net realizable value of the underlying collateral is
sufficient to cover principal and accrued interest. When such a
reversal is made, interest accrued during prior years is charged
to the allowance for loan losses. All other interest reversed on
nonaccrual loans is charged against current year interest income.
Loans are considered impaired when it is probable that the Company
will be unable to fully collect amounts due in accordance with the
contractual terms of the loans. Impaired loans are measured by
using discounted cash flows, except when it is determined that the
sole source of repayment for the loan is operation or liquidation
of the collateral. In such case, the current fair value of the
collateral, reduced by estimated selling costs, is used in place
of discounted cash flows. If the measurement of the impaired loan
is less than the recorded investment in the loan, impairment is
recognized by creating or adjusting an existing allocation of the
allowance for losses on loans.
The Company calculates gains or losses on sales of participating
interests in loans receivable by determining the difference
between the weighted average yield of the loans sold and the yield
rate guaranteed to the purchaser, adjusted for estimated cost of
servicing the loans receivable. The resulting premium or discount
is amortized or accreted to interest income using the level-yield
method over the contractual life of the loans. Loans held for sale
are recorded at the lower of cost or estimated market value.
Loan and commitment fees, net of certain loan origination costs,
are deferred and recognized as an adjustment of yield using the
level-yield method over the contractual lives of the loans.
(e) PROVISION AND ALLOWANCE FOR LOAN LOSSES
The Company's allowance for loan losses (the allowance) is
increased by provisions charged to expenses and reduced by loans
charged off, net of recoveries. It is maintained at a level
considered adequate to absorb potential loan losses determined on
the basis of management's continuing review and evaluation of the
loan portfolio and its judgment as to the impact of economic
conditions on the portfolio. The evaluation by management includes
consideration of past loan loss experience and trends, changes in
the composition of the loan portfolio, the current volume and
condition of loans outstanding and the probability of collecting
all amounts due. The allowance is based primarily on management's
estimates of possible loan losses from these procedures and
historical experiences. These estimates involve judgments and a
certain level of subjectivity; changes in economic conditions may
necessitate revisions in future years.
Various regulatory agencies, as an integral part of their
examination process, periodically review the allowance. Such
agencies may require the Company to record additional provisions
for potential losses based upon their evaluation of information
available at the time of their examination.
F-8
<PAGE> 49
VAIL BANKS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share data)
(f) PREMISES AND EQUIPMENT
Premises and equipment are recorded at cost less accumulated
depreciation and amortization. Depreciation and amortization are
calculated using the straight-line method over the estimated
useful lives of the related assets, which are estimated at up to
50 years for buildings and three to seven years for equipment.
In 1999, the Company changed the estimated useful lives of certain
buildings from 36 to 50 years. The effect on income before income
taxes, net income, basic earnings per share and diluted earnings
per share for the year ended December 31, 1999 was $160, $98,
$0.01 and $0.02, respectively.
(g) INTANGIBLE ASSETS
Intangible assets primarily represent goodwill related to the
excess of cost paid in purchase transactions over the fair value
of the net assets acquired. Amortization is computed using the
straight-line method over 25 years. Capitalized costs and
accumulated amortization for costs in excess of fair value of net
assets acquired as of December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
------- ------
<S> <C> <C>
Capitalized costs $25,773 23,545
Accumulated amortization (1,596) (586)
------- ------
$24,177 22,959
======= ======
</TABLE>
The Company assesses the recoverability of intangible assets by
determining whether the amortization of goodwill over its
remaining life can be recovered through undiscounted future net
cash flows of the acquired institutions. The assessment of the
recoverability of goodwill will be impacted if estimated
undiscounted future net cash flows are not achieved.
(h) FORECLOSED PROPERTIES
Included in other assets on the accompanying consolidated balance
sheets are foreclosed properties which were acquired through
foreclosure, deed in lieu of foreclosure, or repossession.
Foreclosed properties are recorded at the lower of cost or fair
value less estimated costs to sell. Losses at the time of transfer
from loans are charged to the allowance for loan losses.
Subsequent adjustments to value and gains or losses on sales are
included in operating expenses. Rental income and costs of
maintaining the properties are also included in operations.
(i) INCOME TAXES
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. VBI and its subsidiary
file consolidated income tax returns.
(j) CONCENTRATIONS OF CREDIT RISK
Concentrations of credit risk arise when a number of
counterparties have similar economic characteristics that would
cause their ability to meet contractual obligations to be
similarly affected by changes in economic or other conditions. The
Company's loan portfolio consists primarily of
F-9
<PAGE> 50
VAIL BANKS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share data)
commercial and real estate loans located in Colorado, making the
value of the portfolio more susceptible to declines in real estate
values and other changes in economic conditions in Colorado. The
Company does not believe it has a significant exposure to any
individual customer.
(k) DISCLOSURES OF FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards (SFAS) No. 107,
Disclosure about Fair Value of Financial Instruments, requires the
Company to disclose estimated fair values of its financial
instruments. Fair value estimates are made at a specific point in
time, based on relevant market information. These estimates do not
reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of a particular
financial instrument. Because no market exists for a portion of
the Company's financial instruments, fair value estimates are
based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various
financial instruments and other factors. These estimates are
subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the
estimates.
Fair value estimates are based on financial instruments owned at
December 31, 1999 and 1998 without attempting to estimate the
value of anticipated future business and the value of assets and
liabilities that are not considered financial instruments,
including deferred tax assets and premises and equipment. In
addition, the tax ramifications related to the realization of
unrealized gains and losses can have a significant effect on fair
value estimates and have not been considered in these estimates.
(l) EARNINGS PER SHARE
The Company computes basic and diluted earnings per share in
accordance with SFAS No. 128, Earnings per Share (Statement 128).
Basic earnings per share is computed by dividing net income
available to common shareholders by the weighted-average number of
common shares outstanding during the period. Diluted earnings per
share is computed similar to basic earnings per share, except that
the denominator is increased to include the number of additional
common shares that would have been outstanding if dilutive
potential common shares had been issued. In addition, the
numerator is adjusted for any changes in net income that would
have resulted from the assumed conversion of the potential common
shares and includes the preferred stock dividends.
(m) STOCK INCENTIVE PLAN
The Company accounts for its stock incentive plans in accordance
with SFAS No. 123, Accounting for Stock-Based Compensation
(Statement 123), which permits entities to expense over the
vesting period the fair value of stock-based awards as measured on
the date of grant. Alternatively, Statement 123 allows entities to
apply the provisions of APB Opinion No. 25 while disclosing pro
forma net income and pro forma earnings per share for employee
stock option grants made in 1995 and future years as if the
fair-value-based method defined in Statement 123 had been applied.
The Company has elected to apply the provisions of APB Opinion No.
25 and provide the pro forma disclosure provisions of Statement
123.
F-10
<PAGE> 51
(n) USE OF ESTIMATES
The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities as of the date of the consolidated financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
(o) RECLASSIFICATIONS
Certain reclassifications have been made to the previous financial
statements to conform to their 1999 presentation.
(2) BUSINESS COMBINATIONS
(a) WORLD SAVINGS BRANCH
On May 21, 1999, WestStar Bank purchased certain assets and
assumed certain liabilities of the Glenwood Springs, Colorado
branch of World Savings Bank, FSB, Oakland, California for $1,346
in cash. Cash and deposits of $36,897 and $36,835, respectively,
were acquired in the purchase, and goodwill of $997 was recorded.
(b) TELLURIDE BANCORP, LTD.
On December 15, 1998, the Company purchased all of the outstanding
stock of Telluride Bancorp, Ltd. (Telluride) and its wholly owned
subsidiaries, Bank of Telluride and Western Colorado Bank, for
$13,331 in cash and 908,913 shares of stock.
The acquisition has been accounted for under the purchase method
of accounting, and accordingly, the purchase price has been
allocated to the assets acquired and the liabilities assumed based
on the estimated fair value at the date of acquisition. The excess
of purchase price over the fair value of net assets acquired has
been recorded as goodwill and is being amortized over 25 years.
The estimated fair values of assets and liabilities acquired are
summarized as follows (in thousands):
<TABLE>
<S> <C>
Cash and due from banks $ 7,340
Federal funds sold 10,825
Investment securities 23,078
Loans, net of allowance for loan losses of $1,153 80,598
Premises and equipment 9,366
Other assets 1,703
Goodwill 14,395
Deposits (119,897)
Notes payable (1,114)
Other liabilities (1,510)
---------
Consideration and expenses paid $ 24,784
=========
</TABLE>
F-11
<PAGE> 52
VAIL BANKS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share data)
(c) INDEPENDENT BANKSHARES, INC.
On July 31, 1998, the Company purchased all of the outstanding
stock of Independent Bankshares, Inc. (Independent) and its
subsidiary bank, Glenwood Independent Bank (Glenwood), for $3,816
in cash and 318,770 shares of stock.
The acquisition has been accounted for under the purchase method
of accounting, and accordingly, the purchase price has been
allocated to the assets acquired and the liabilities assumed based
on the estimated fair value at the date of acquisition. The excess
of the purchase price over the net assets acquired of $7,120 has
been recorded as goodwill and is being amortized over 25 years.
(d) CEDAREDGE FINANCIAL SERVICES, INC.
On November 30, 1997, the Company purchased all of the outstanding
stock of Cedaredge Financial Services, Inc. (Cedaredge) and its
wholly owned subsidiary, Western Community Bank. These entities
were merged into the Company. The Company paid cash of $3,250 and
assumed Cedaredge's mandatorily convertible debentures of $1,600.
The acquisition has been accounted for under the purchase method
of accounting, and the excess of the purchase price over the fair
value of net assets acquired of $1,831 has been recorded as
goodwill and is being amortized over 25 years.
F-12
<PAGE> 53
VAIL BANKS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share data)
The Company has entered into consulting and non-complete
agreements with two of Cedaredge's executives. Under the
agreement, annual payments of $110 are payable to these
individuals for five years, beginning in 1997. Future maturities
of the remaining obligation are as follows:
<TABLE>
<CAPTION>
YEAR ENDING PRINCIPAL
DECEMBER 31, MATURITIES INTEREST TOTAL
------------ ---------- -------- -----
<S> <C> <C> <C>
2000 $ 93 17 110
2002 102 8 110
---------- -------- -----
$ 195 25 220
========== ======== =====
</TABLE>
(e) VNB BUILDING CORPORATION
In 1994, the Company purchased a 28% interest in Vail 108 Limited
(Vail 108), the only asset owned at the time by VNB Building
Corporation (VNB). In December 1997, the Company acquired the
remaining interest in Vail 108 through a merger with VNB. VNB
owned the property in which the Company's main branch in Vail is
located. In connection with the merger, the Company issued 34,258
shares of Series A Preferred Stock for $2,960 and cash of $300.
Such preferred stock was converted to common shares on a
share-for-share basis in conjunction with the Company's initial
public offering.
(f) PRO FORMA RESULTS OF OPERATIONS (UNAUDITED)
The operating results of the Company's acquisitions are included
in the Company's consolidated results of operations from the dates
of acquisition. The following unaudited pro forma summary presents
the consolidated results of operations as if the acquisitions of
Telluride and Independent had occurred at the beginning of 1997,
after giving effect to certain adjustments, including
depreciation, amortization of intangible assets, debt repayment,
dividends on preferred stock and income taxes. These pro forma
results have been prepared for comparative purposes only and do
not purport to be indicative of either what would have occurred
had the acquisitions been made as of those dates or results which
may occur in the future.
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Interest income $32,053 28,303
Interest expense 11,519 9,801
------- -------
20,534 18,502
Provision for loan losses 442 475
------- -------
Net interest income after provision for loan losses 20,092 18,027
Non-interest income 3,418 3,181
Non-interest expense 19,581 19,092
------- -------
Income before income taxes 3,929 2,116
Income taxes 1,464 907
------- -------
Net income $ 2,465 1,209
======= =======
</TABLE>
F-13
<PAGE> 54
VAIL BANKS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share data)
(3) INVESTMENT SECURITIES
Investment securities at December 31 consist of the following:
<TABLE>
<CAPTION>
1999
-------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Available-for-sale
U.S. Treasury $ 1,808 -- (4) 1,804
Government agencies 13,664 -- (246) 13,418
State and municipal 6,128 10 (83) 6,055
Mortgage-backed securities 8,190 -- (384) 7,806
Equity securities 2,363 -- -- 2,363
------- ------- ------- -------
$32,153 10 (717) 31,446
======= ======= ======= =======
Held-to-maturity
U.S. Treasury $ 3,994 -- (25) 3,969
Mortgage-backed securities 1,351 -- (31) 1,320
------- ------- ------- -------
$ 5,345 -- (56) 5,289
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
1998
-------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Available-for-sale
U.S. Treasury $ 8,466 27 (2) 8,491
Government agencies 13,723 8 (2) 13,729
State and municipal 7,928 29 (5) 7,952
Mortgage-backed securities 811 1 -- 812
Equity securities 2,038 -- -- 2,038
------- ------- ------- -------
$32,966 65 (9) 33,022
======= ======= ======= =======
Held-to-maturity
U.S. Treasury $ 5,986 63 -- 6,049
State and municipal 50 -- -- 50
Mortgage-backed securities 1,677 38 -- 1,715
------- ------- ------- -------
$ 7,713 101 -- 7,814
======= ======= ======= =======
</TABLE>
F-14
<PAGE> 55
VAIL BANKS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share data)
Expected maturities of investment securities may differ from contractual
maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties. Maturities of
investment securities at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
----------------------- -----------------------
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Due within one year $ 7,076 7,061 -- --
Due after one year through five years 11,139 10,952 3,994 3,968
Due after five years through ten years 2,807 2,712 381 375
Due after ten years 11,131 10,721 970 946
------- ------- ------- -------
$32,153 31,446 5,345 5,289
======= ======= ======= =======
</TABLE>
Securities with a carrying value of $21,739 and $30,329 at December 31,
1999 and 1998, respectively, are pledged as collateral to secure public
deposits and for other purposes as permitted or required by law.
As a member of the Federal Home Loan Bank (FHLB) system, the Company is
required to maintain an investment in stock of the FHLB equal to the
greater of 1% of certain residential mortgages or 5% of FHLB advances.
The Company has a blanket pledge with the FHLB and has pledged all of its
stock in the FHLB, and all otherwise unpledged or unencumbered federal
funds sold, government agency securities, certain qualifying loans and
mortgaged-backed securities.
(4) LOANS
Loans at December 31 consist of the following:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Commercial and industrial $165,373 130,677
Real estate - construction 80,959 55,642
Real estate - mortgage 59,898 51,000
Consumer and other 30,505 31,872
-------- --------
$336,735 269,191
======== ========
</TABLE>
Transactions in the allowance for loan losses are summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Allowance at beginning of year $ 2,590 1,364 823
Loans charged off (381) (168) (58)
Recoveries on loans previously charged off 75 48 24
Provision for loan losses 455 -- 232
Acquired through acquisition -- 1,346 343
------- ------- -------
Allowance at end of year $ 2,739 2,590 1,364
======= ======= =======
</TABLE>
F-15
<PAGE> 56
VAIL BANKS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share data)
The principal balance of loans on which the accrual of interest has been
discontinued was $1,843 and $322 at December 31, 1999 and 1998,
respectively. Interest income that would have been recorded for
nonaccrual loans had they been performing in accordance with their
contractual requirements was $127 and $74 for the years ended December
31, 1999 and 1998, respectively. Actual interest income recorded for
these loans was $84 and $44 for the years ended December 31, 1999 and
1998, respectively.
The recorded investment in impaired loans and the related impairment
allowance determined under SFAS No. 114, Accounting by Creditors for
Impairment of a Loan and SFAS No. 118, Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures (collectively
referred to as Statement 114), was $854 and $494, respectively, at
December 31, 1999 and $1,616 and $350, respectively, at December 31,
1998. All impaired loans have associated impairment allowances. The
majority of impaired loans requiring a Statement 114 allowance are
measured using the fair value of the underlying collateral since these
loans are considered collateral dependent.
The average recorded investment in impaired loans for the years ended
December 31, 1999 and 1998 was $890 and $108, respectively. Interest
recorded on impaired loans for the years ended December 31, 1999 and 1998
was $42 and $266, respectively.
(5) PREMISES AND EQUIPMENT
Premises and equipment at December 31 consist of the following:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Land $ 6,207 5,922
Buildings 22,377 19,521
Leasehold improvements 2,141 3,662
Furniture, fixtures and equipment 9,504 8,510
-------- --------
40,229 37,615
Accumulated depreciation and amortization (5,275) (5,968)
-------- --------
Premises and equipment, net $ 34,954 31,647
======== ========
</TABLE>
Depreciation and amortization expense on premises and equipment was
$2,026, $1,421 and $885 for the years ended December 31, 1999, 1998 and
1997, respectively.
F-16
<PAGE> 57
VAIL BANKS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share data)
(6) DEPOSITS
Deposits at December 31 consist of the following:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Non-interest bearing checking $ 86,991 91,510
Interest bearing checking 64,753 61,050
Money market 102,784 90,839
Savings 31,451 42,165
Certificates of deposit under $100,000 58,246 47,536
Certificates of deposit $100,000 and over 28,517 44,472
-------- --------
$372,742 377,572
======== ========
</TABLE>
Scheduled maturities of time deposits at December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
2004 AND
2000 2001 2002 2003 THEREAFTER TOTAL
------- ------- ------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Certificates of deposit
under $100,000 $48,620 6,049 2,264 863 450 58,246
Certificates of deposit
$100,000 and over 26,539 1,034 742 202 -- 28,517
------- ------- ------- ------- ------- -------
$75,159 7,083 3,006 1,065 450 86,763
======= ======= ======= ======= ======= =======
</TABLE>
(7) RELATED PARTY TRANSACTIONS
The Company had net loans receivable from directors, executive officers
and principal shareholders (more than ten percent ownership through
attribution) of the Company and their related businesses at December 31
as follows:
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Directors and principal shareholders $6,124 322
Executive officers 99 85
------ ------
$6,223 407
====== ======
</TABLE>
(8) SHORT-TERM BORROWINGS
Short-term borrowings at December 31, 1999 consist of the following:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
AMOUNT MATURITY INTEREST RATE
------- -------- -------------
<S> <C> <C> <C>
Federal funds purchased $11,060 -- 6.00%
FHLB advances 19,000 2000 5.92%
-------
$30,060
=======
</TABLE>
F-17
<PAGE> 58
VAIL BANKS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share data)
Advances from the FHLB are secured by the Company's FHLB stock,
qualifying loans receivable and investment securities.
(9) COMMITMENTS
LEASES
The Company leases facilities and equipment under leases that expire
through the year 2010. Several leases have renewal options. Future
minimum rental commitments under the leases as of December 31, 1999 are
as follows:
<TABLE>
<CAPTION>
FACILITIES EQUIPMENT TOTAL
---------- --------- ------
<S> <C> <C> <C>
2000 $ 570 40 610
2001 436 18 454
2002 416 -- 416
2003 417 -- 417
2004 and thereafter 1,020 -- 1,020
------ ------ ------
$2,859 58 2,917
====== ====== ======
</TABLE>
Rental expense for December 31, 1999, 1998 and 1997 was $590, $587 and
$749, respectively.
(10) INCOME TAXES
Income taxes for the years ended December 31 were allocated as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Income from continuing operations $ 3,041 955 288
Shareholders' equity for unrealized gains (losses)
on investment securities (254) 5 9
------- ------- -------
$ 2,787 960 297
======= ======= =======
</TABLE>
Income taxes (benefit) for the years ended December 31, consists of the
following:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- ------
<S> <C> <C> <C>
Year ended December 31, 1999
Federal $2,183 537 2,720
State 265 56 321
------ ------ ------
$2,448 593 3,041
====== ====== ======
Year ended December 31, 1998
Federal $ 53 960 1,013
State -- (58) (58)
------ ------ ------
$ 53 902 955
====== ====== ======
</TABLE>
F-18
<PAGE> 59
VAIL BANKS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share data)
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -----
<S> <C> <C> <C>
Year ended December 31, 1997
Federal $ 14 274 288
State -- -- --
---- ---- ----
$ 14 274 288
==== ==== ====
</TABLE>
Income taxes differs from the amounts computed by applying the U.S.
federal income tax rate to pretax earnings as a result of the following:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Computed "expected" tax expense $ 2,685 991 259
State income taxes, net of federal
income tax effects 175 (38) --
Decrease in valuation allowance on
deferred tax assets -- (58) --
Tax-exempt interest (91) (53) (8)
Goodwill amortization 334 93 41
Other, net (62) 20 (4)
------- ------- -------
$ 3,041 955 288
======= ======= =======
</TABLE>
The significant components of deferred income taxes attributable to
income from continuing operations for the years ended December 31 are as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Deferred tax expense (exclusive of the
effects of other components below) $593 960 274
Decrease in beginning-of-the-year
balance of the valuation allowance for
deferred tax assets -- (58) --
---- ---- ----
$593 902 274
==== ==== ====
</TABLE>
F-19
<PAGE> 60
VAIL BANKS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share data)
Temporary differences between financial statement carrying amounts and
tax bases of assets and liabilities resulting in significant components
of deferred income taxes at December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Deferred tax assets
Net operating loss carryforwards $ 845 1,349
Allowance for loan losses 277 425
Unrealized losses on investment securities
available for sale 240 --
Other 306 380
------ ------
Total deferred tax assets 1,668 2,154
------ ------
Deferred tax liabilities
Allowance for loan losses -- 307
Basis of premises and equipment 1,004 815
Unrealized gains on investment securities
available for sale -- 14
Other 79 47
------ ------
Total deferred tax liabilities 1,083 1,183
------ ------
Net deferred tax asset $ 585 971
====== ======
</TABLE>
In assessing the realization of deferred tax assets, management considers
the reversal of existing temporary differences and estimated future
taxable income. The ultimate realization of deferred tax assets is
dependent on the generation of future taxable income in the period in
which temporary differences become deductible. The Company believes that
it is more likely than not that the deferred tax assets will be realized.
The Company's net operating loss carryforwards are attributable to the
prior operations of a bank that was merged into the Company in January
1993 for which a quasi reorganization was effected. Therefore, the
realization of such carryforwards were recognized as a direct addition to
shareholders' equity in accordance with SFAS No. 109, Accounting for
Income Taxes.
At December 31, 1999, the Company has net operating loss carryforwards
for federal income tax purposes of $1,600, the components of which expire
in the years 2006 and 2007. The Company also has $8,800 of additional net
operating loss carryforwards for state income tax purposes, the
components of which expire in the years 2006 through 2010. These net
operating loss carryforwards are subject to separate return limitations.
F-20
<PAGE> 61
VAIL BANKS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share data)
(11) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit and letters of credit.
Those instruments involve, to a varying degree, elements of credit risk
in excess of the amount recognized in the balance sheet. The contract
amounts of those instruments reflect the extent of involvement the
Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of non-performance by
the other party to the financial instrument for commitments to extend
credit and standby letters of credit is represented by the contractual
amount of those instruments. The Company uses the same credit policies in
making commitments and conditional obligations as it does for on-balance
sheet instruments. At December 31 these commitments are as follows:
<TABLE>
<CAPTION>
1999 1998
------- ------
<S> <C> <C>
Financial instruments whose contractual
amounts represent credit risk
Commitments to extend credit $52,600 54,963
Letters of credit 2,193 3,502
------- ------
$54,793 58,465
======= ======
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments
are expected to expire without being drawn upon, the commitments do not
necessarily represent future cash requirements. The Company evaluates
each customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained is based on management's credit evaluation.
Collateral held varies, but may include accounts receivable, inventory,
property, plant and equipment and income producing commercial properties.
Letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers.
F-21
<PAGE> 62
VAIL BANKS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share data)
(12) SHAREHOLDERS' EQUITY
(a) SHAREHOLDERS' AGREEMENTS
During 1996 through 1998, the Company and certain of its
shareholders entered into shareholder agreements containing terms
and conditions affecting the ownership of shares covered by such
agreements. In December 1998, these agreements were terminated in
conjunction with the initial public offering.
In 1998 and 1997, shares of common stock totaling 34,840, and
13,580, respectively, were issued for services under the
agreements. The services were valued at the book value of the
stock issued of $207 and $76, respectively. These amounts were
charged to income in the year incurred.
(b) STOCK INCENTIVE PLAN
In January 1998, the Company adopted a Stock Incentive Plan (the
Plan) pursuant to which the Compensation Committee of the Board of
Directors may grant incentive stock options, nonqualified stock
options, restricted stock awards and performance share awards to
certain employees, directors and others that perform services for
the Company.
The number of shares available for grant of awards under the Plan,
if any, will be determined by the Company's shareholders. If
granted, outstanding options will be counted against the
authorized pool of shares, regardless of their vested status.
The option price for each grant of a stock option will not be less
than the fair market value on the date the option is granted. The
committee may determine the restrictions and conditions under
which options may be exercised. Options must be exercised within
ten years of the date granted.
The Plan provides for the grant of restricted stock awards subject
to restrictions, which the committee may determine. The
restrictions would typically require continued employment in order
to vest in the restricted stock. Vesting may also be based upon
attainment of certain performance measures.
At December 31, 1999, there were 444,118 shares available for
grant under the Plan. The per share weighted-average fair value of
stock options granted during 1999 was $3.55 on the date of grant
using the Black Scholes option-pricing model with the following
weighted-average assumptions: 1999 - expected dividend yield of
0.0%, risk-free interest rate of 6.6%, expected life of 4 years,
and calculated volatility of the stock over the life of the
options of 27.0%.
The Company applies APB Opinion No. 25 in accounting for options
granted under the Plan and, accordingly, no compensation cost has
been recognized for its stock options in the financial statements.
F-22
<PAGE> 63
VAIL BANKS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share data)
Had the Company determined compensation cost based on the fair
value at the grant date for its stock options under Statement 123,
the Company's net income would have been reduced to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Net income
As reported $ 4,856 1,959
Pro forma 4,626 1,855
Earnings per share - diluted
As reported $ 0.80 0.47
Pro forma 0.76 0.47
</TABLE>
Stock option activity since the Plan's inception in 1999 is as
follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
Options outstanding at December 31, 1997 -- $ --
Granted 319,000 8.66
Forfeited (3,000) 8.54
-------
Options outstanding at December 31, 1998 316,000 8.66
Granted 124,270 11.48
Forfeited (7,150) 9.65
-------
Options outstanding at December 31, 1999 433,120 $ 9.46
======= ======
Options exercisable at December 31, 1999 83,000 $ 8.66
======= ======
</TABLE>
At December 31, 1999, the range of exercise prices and
weighted-average remaining contractual life of outstanding options
was $8.54 to $12.25 and 3.3 to 9.9 years, respectively.
In November 1999, the Company granted 28,762 restricted shares of
common stock to officers of the Company. These shares were granted
under the Plan. The Company will recognize compensation expense of
$302 ratably over the vesting period of 10 years. For the year
ended December 31, 1999, compensation expense related to the
vested shares was $3.
(c) MANDATORILY CONVERTIBLE DEBENTURES
In connection with its acquisition of Cedaredge, the Company
assumed mandatorily convertible debentures totaling $1,600. In
connection with the Company's initial public offering, the
debentures were mandatorily converted to 300,000 shares of the
Company's common stock.
F-23
<PAGE> 64
VAIL BANKS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share data)
(d) PREFERRED STOCK
In connection with the Company's initial public offering, each
share of Series A preferred stock, was mandatorily converted into
one share of common stock. Dividends on the stock were payable
quarterly at the rate of 8% in either cash or in shares of Series
B Preferred stock at the option of the Board of Directors. Series
A and Series B preferred stock of 200,000 and 50,000 shares,
respectively, remain authorized as of December 31, 1999.
In December 1998, the Company's Board of Directors authorized an
additional 2,000,000 shares of preferred stock. None of these
shares were issued in 1999 or 1998.
(e) EARNINGS PER SHARE
The following table presents the income and average outstanding
share amounts used to calculate earnings per share for the years
ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Basic earnings per share computation
Net income $ 4,856 1,959 474
Preferred stock dividends -- (690) --
---------- ---------- ----------
Income available to shareholders $ 4,856 1,269 474
========== ========== ==========
Average shares outstanding - basic 6,040,618 2,691,987 2,100,423
Basic earnings per share $ 0.80 0.47 0.23
========== ========== ==========
Diluted earnings per share computation
Income available to shareholders $ 4,856 1,269 474
Income impact of assumed conversions:
Preferred stock -- 690 --
Mandatorily convertible debentures -- 141 13
---------- ---------- ----------
Net income available to shareholders
plus assumed conversions $ 4,856 2,100 487
========== ========== ==========
Weighted-average shares
Average shares outstanding - basic 6,040,618 2,691,987 2,100,423
Shares assumed issued:
Options 50,136 65,723 --
Restricted stock plan 881 -- --
Preferred stock -- 321,931 28,230
Mandatorily convertible debentures -- 281,919 25,000
---------- ---------- ----------
Average shares outstanding - diluted 6,091,635 3,361,560 2,153,653
========== ========== ==========
Diluted earnings per share $ 0.80 0.47 0.23
========== ========== ==========
</TABLE>
F-24
<PAGE> 65
VAIL BANKS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share data)
(13) NOTES PAYABLE
At December 31, 1998, notes payable consist of three notes with
maturities ranging from January 1, 1999 to August 29, 2001, with interest
rates ranging from 8.25% to 8.75%. In February 1999, the Company repaid
all outstanding balances on its notes payable.
(14) 401(K) PLAN
In August 1996, the Company established a qualified 401(k) Plan (the
401(k) Plan) covering all full-time employees, as defined in the 401(k)
Plan. Employees who are eligible may defer up to 15% of their
compensation, subject to the annual limitations imposed by the Internal
Revenue Code. The Company matches a discretionary percentage of the
employees' contributions; these matches vest ratably over five years. In
addition, the Company may make additional profit sharing contributions.
Employers' contributions to the 401(k) Plan for the years ended December
31, 1999, 1998 and 1997 were $56, $50 and $40, respectively. The Company
does not have a defined benefit plan.
(15) REGULATORY MATTERS
The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could
have a direct material effect on the Company's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company must meet specific capital guidelines that
involve quantitative measures of assets, liabilities and certain
off-balance sheet items as calculated under regulatory accounting
practices. The Company's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital
(as defined) to average assets (as defined). Management believes, as of
December 31, 1999, that the Company meets all capital adequacy
requirements to which it is subject.
F-25
<PAGE> 66
VAIL BANKS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share data)
The most recent notification from the Federal Reserve categorized the
Company as "well capitalized" under the regulatory framework. To be
categorized as "well capitalized" the Company must maintain minimum total
risk-based, Tier 1 risk-based and Tier 1 leverage capital ratios as set
forth in the following table:
<TABLE>
<CAPTION>
ADEQUATELY WELL
ACTUAL CAPITALIZED CAPITALIZED
------------------ ------------------------------ -------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ------ ------- ---------------- ------- -----------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999
Total capital
(to risk weighted assets) $38,411 11.59% $26,510 > or equal to 8% $33,138 > or equal to 10%
Tier 1 capital
(to risk weighted assets) $35,672 10.76% $13,255 > or equal to 4% $19,883 > or equal to 6%
Tier 1 leverage capital
(to average assets) $35,672 8.14% $13,150 > or equal to 3% $21,916 > or equal to 5%
As of December 31, 1998
Total capital
(to risk weighted assets) $34,586 12.34% $22,414 > or equal to 8% $28,017 > or equal to 10%
Tier 1 capital
(to risk weighted assets) $31,996 11.42% $11,207 > or equal to 4% $16,810 > or equal to 6%
Tier 1 leverage capital
(to average assets) $31,996 7.69% $12,485 > or equal to 3% $20,808 > or equal to 5%
</TABLE>
(16) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following summary presents the methodologies and assumptions used to
estimate the fair value of the Company's financial instruments. The
Company operates as a going concern and, except for its investment
portfolio, no active market exists for its financial instruments. Much of
the information used to determine fair value is highly subjective and
judgmental in nature and, therefore, the results may not be precise. The
subjective factors include, among other things, estimates of cash flows,
risk characteristics, credit quality and interest rates, all of which are
subject to change. Since the fair value is estimated as of the balance
sheet date, the amounts which will actually be realized or paid upon
settlement or maturity of the various financial instruments could be
significantly different.
Cash and due from banks are valued at their carrying amounts, which are
reasonable estimates of fair value, due to the relatively short period to
maturity of the instruments.
Investments securities are valued based on quoted bid prices, if
available. If quoted bid prices are not available, fair value is
estimated using quoted market prices for similar securities.
The fair value of fixed rate loans is estimated by discounting the future
cash flows using the current rates at which similar loans would be made
to borrowers with similar credit ratings and for the same remaining
maturities. For variable rate loans, the carrying amount is a reasonable
estimate fair value.
F-26
<PAGE> 67
VAIL BANKS, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share data)
The fair value of non-interest bearing and interest bearing demand
deposits and savings accounts is determined to be the amount payable on
demand at the reporting date. The fair value of fixed maturity
certificates of deposit is estimated using a discounted cash flow
calculation that applies the rates currently offered for deposits of
similar remaining maturities.
For short-term borrowings, the carrying amount is a reasonable estimate
of fair value.
The fair value of long-term borrowings is estimated by discounting the
future cash flows using the current rate at which a similar borrowing
could be financed.
The fair value of commitments is estimated using the fees currently
charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present credit worthiness of
the counterparts. For fixed-rate loan commitments, fair value also
considers the difference between current levels of interest rates and the
committed rates. The fair value of letters of credit and lines of credit
is based on fees currently charged for similar agreements or on the
estimated cost to terminate them or otherwise settle the obligations with
the counterparts at the reporting date.
The carrying amounts and estimated fair values of financial instruments
at December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
------------------------- --------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Financial assets
Cash and due from banks $ 29,971 29,971 28,469 28,469
Investment securities 36,791 36,735 40,735 40,837
Loans, net 333,996 329,985 266,601 266,429
Financial liabilities
Deposits, demand and savings 285,979 285,979 285,564 285,564
Deposits with stated maturities 86,763 86,778 92,008 92,289
Short-term borrowings 30,060 30,060 -- --
Notes payable -- -- 1,114 1,114
</TABLE>
(17) SUBSEQUENT EVENT
Effective January 1, 2000, WestStar acquired First Western Mortgage
Services, Inc. (First Western) for consideration that includes cash, VBI
common stock and installment notes. First Western will operate as a
wholly-owned subsidiary of WestStar.
F-27
<PAGE> 68
VAIL BANKS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share data)
(18) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data of the Company for the eight
quarters ended December 31, 1999 are as follows:
<TABLE>
<CAPTION>
1999 1998
-------------------------------------------- --------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 March 31 June 30 September 30 December 31
-------- ------- ------------ ----------- -------- ------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total interest income $7,914 8,687 9,094 9,387 4,645 5,191 5,493 6,054
Net interest income 5,278 6,133 6,466 6,337 2,896 3,318 3,452 3,908
Provision for loans losses -- 80 150 225 -- -- -- --
Net interest income after
provision for loan losses 5,278 6,053 6,316 6,112 2,896 3,318 3,452 3,908
Income before income taxes 1,206 2,018 2,374 2,299 522 758 795 839
Net income 716 1,253 1,480 1,407 340 495 510 614
Earnings per share - diluted $ 0.12 0.21 0.24 0.23 0.12 0.18 0.16 0.03
</TABLE>
F-28
<PAGE> 69
VAIL BANKS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share data)
(19) PARENT COMPANY FINANCIAL INFORMATION
Condensed parent company financial information is as follows:
Condensed Balance Sheets
December 31,
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
ASSETS
Cash $ 2,958 5,192
Investment in subsidiary 52,335 49,934
Other assets 3,468 2,712
------- -------
$58,761 57,838
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable $ -- 1,114
Other liabilities 34 2,347
------- -------
34 3,461
Shareholders' equity 58,727 54,377
------- -------
$58,761 57,838
======= =======
</TABLE>
<TABLE>
<CAPTION>
Condensed Statements of Income
Years ended December 31,
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Income
Equity in earnings of subsidiary $5,475 2,386 996
Other 72 -- --
Expenses
Interest 14 252 136
Salaries, benefits and other compensation 469 248 404
Other 499 120 250
------ ------ ------
982 620 790
------ ------ ------
Income before income taxes 4,565 1,766 206
Income tax benefit 291 193 268
------ ------ ------
Net income $4,856 1,959 474
====== ====== ======
</TABLE>
F-29
<PAGE> 70
VAIL BANKS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share data)
Condensed Statements of Cash Flows
Years ended December 31,
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 4,856 1,959 474
Adjustments to reconcile net income to net
cash provided from operating activities,
net of effects of business combinations:
Equity in undistributed income from
subsidiaries (2,909) -- (786)
Depreciation and amortization 111 19 10
Common stock issued for services 3 207 76
Change in other assets and accrued liabilities (3,181) 105 (287)
------- ------- -------
Net cash provided (used) by
operating activities (1,120) 2,290 (513)
------- ------- -------
Cash flows from investing activities
Acquisition of subsidiary banks -- (15,121) (2,160)
Other -- -- (60)
------- ------- -------
Net cash used by investing activities -- (15,121) (2,220)
------- ------- -------
Cash flows from financing activities
Repayments of notes payable (1,114) (1,200) (200)
Proceeds from issuance of common stock -- 19,806 3,026
Preferred dividends paid -- (690) --
Cash paid in conversion of preferred stock
to common stock -- (20) --
------- ------- -------
Net cash provided (used) by
financing activities (1,114) 17,896 2,826
------- ------- -------
Net increase (decrease) in cash
and due from banks (2,234) 5,065 93
Cash and due from banks - beginning of year 5,192 127 34
------- ------- -------
Cash and due from banks - end of year $ 2,958 5,192 127
======= ======= =======
</TABLE>
F-30
<PAGE> 71
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
2.1 Merger Agreement and Plan of Reorganization by and between Vail Banks, Inc. and
Telluride Bancorp, Ltd., dated April 16, 1998, as amended*
2.2 Merger Agreement and Plan of Reorganization by and between Vail Banks, Inc.,
WestStar Bank, Independent Bankshares, Inc., and Glenwood Independent Bank,
dated March 10, 1998*
3.1 Amended and Restated Articles of Incorporation of the Registrant*
3.2 Amended and Restated Bylaws of the Registrant*
10.1 Stock Purchase Agreement by and between Vail Banks, Inc., WestStar Bank,
Cedaredge Financial Services, Inc., Western Community Bank, and certain
Company Shareholders, dated July 3, 1997*
10.2 Stock Incentive Plan, as amended*(1)
10.3 Change in Control Severance Payment Agreement by and between Vail Banks, Inc. and
E.B. Chester, dated November 19, 1999
10.4 Change in Control Severance Payment Agreement by and between Vail Banks, Inc. and
Lisa M. Dillon, dated November 19, 1999
10.5 Amended and Restated Stock Incentive Plan Restricted Stock Award Agreement by and
between Vail Banks, Inc. and Lisa M. Dillon, dated November 19, 1999
10.6 Amended and Restated Stock Incentive Plan Restricted Stock Award Agreement by and
between Vail Banks, Inc. and E.B. Chester, dated November 19, 1999
16.1 Letter of change of certifying accountant*
21.1 Subsidiaries of the Registrant
24.1 Power of Attorney (on signature page)
27.1 Financial Data Schedule
</TABLE>
- --------------------
(1) Management contract or compensatory plan required to be filed as an
exhibit.
* Incorporated by reference from the Registrant's Form SB-2, as amended,
Commission File No. 333-60347.
** Incorporated by reference from the Registrant's Form SB-2, Commission
File No. 333-74571.
<PAGE> 1
EXHIBIT 10.3
CHANGE IN CONTROL
SEVERANCE PAYMENT AGREEMENT
This Agreement, made and entered into as of the 19th day of November,
1999, by and between VAIL BANKS, INC., an Colorado corporation (the "Company"),
and E.B. CHESTER (hereinafter called the "Executive"),
W I T N E S S E T H:
WHEREAS, the Executive is currently employed by the Company and certain
of its subsidiaries in various capacities and is rendering valuable services to
the Company and such subsidiaries; and
WHEREAS, the Company desires to retain the Executive and is aware that
the possibility of a Change in Control of the Company (as defined in Section 3)
might impede the accomplishment of this end; and
WHEREAS, the Company wishes to induce the Executive to remain in his
present employment and believes that the execution of this Agreement will
further its aim in retaining the Executive during an actual or attempted Change
in Control and will tend to assure fair treatment of executives in the event of
a Change in Control;
NOW, THEREFORE, for and in consideration of the premises and of the
Executive's continuation in his present employment with the Company, the parties
hereto agree as follows:
1. Duties and Status of Executive.
The Executive shall continue to perform such duties and
responsibilities as shall be assigned to him by the Board of Directors of the
Company. The Executive shall devote his working time and attention to the
discharge of his duties with the Company and its subsidiaries. In addition to
the compensation and other benefits provided the Executive by the Company, the
Executive shall have the additional benefits provided by this Agreement.
2. Term.
(a) Initial Term. The term of this Agreement shall
initially be a fixed period of two years that expires on the second
anniversary of the date of this Agreement and may be extended as
provided in subsection (b) below.
<PAGE> 2
(b) Extension. The term of this Agreement shall be
extended automatically on the first anniversary and on each subsequent
anniversary of the date of this Agreement (each such anniversary being
referred to as an "Extension Date") for an additional one year period
so that the Agreement then expires on the second anniversary of the
applicable Extension Date; provided that
(i) the then current term of this Agreement will
not be extended on any Extension Date if,
(A) not later than 90 days before such
Extension Date the Company gives the Executive
written notice that it does not wish to extend the
term, or
(B) before such Extension Date the
Company terminates the employment of the Executive
for Cause (as defined in Section 4(b), and
(ii) whether or not the Company has given notice
to the Executive pursuant to clause (i) (A) above that it does
not wish to extend the term of this Agreement, if a Change in
Control occurs during the initial term of this Agreement, or
any extension thereof, the term of this Agreement shall not
expire sooner than the third anniversary of the date of such
Change in Control.
3. Change in Control. For the purposes of this Agreement, a
"Change in Control" shall be deemed to have occurred in the event of:
(a) an acquisition by any Person of Beneficial Ownership
of the Shares of the Company then outstanding (the "Company Common
Stock Outstanding") or the voting securities of the Company then
outstanding entitled to vote generally in the election of directors
(the "Company Voting Securities Outstanding"), if such acquisition of
Beneficial Ownership results in the Person beneficially owning (within
the meaning of Rule 13d-3 promulgated under the Exchange Act)
twenty-five percent (25%) or more of the Company Common Stock
Outstanding or twenty-five percent (25%) or more of the combined voting
power of the Company Voting Securities Outstanding; provided, that
immediately prior to such acquisition such Person was not a direct or
indirect Beneficial Owner of twenty-five percent (25%) or more of the
Company Common Stock Outstanding or twenty-five percent (25%) or more
of the combined voting power of Company Voting Securities Outstanding,
as the case may be; or
(b) the approval by the shareholders of the Company of a
reorganization, merger, consolidation, complete liquidation or
dissolution of the Company, the sale or disposition of all or
substantially all of the assets of the Company or similar corporate
transaction (in each case referred to in this Section 3 as a "Corporate
Transaction")
2
<PAGE> 3
or, if consummation of such Corporate Transaction is subject, at the
time of such approval by shareholders, to the consent of any government
or governmental agency, the obtaining of such consent (either
explicitly or implicitly); or
(c) a change in the composition of the Board such that
the individuals who, as of the date of this Agreement, constitute the
Board (such Board shall be hereinafter referred to as the "Incumbent
Board") cease for any reason to constitute at least a majority of the
Board; provided, however, for purposes of this Section 3 that any
individual who becomes a member of the Board subsequent to the date of
this Agreement whose election, or nomination for election by the
Company's shareholders, was approved by a vote of at least a majority
of those individuals who are members of the Board and who were also
members of the Incumbent Board (or deemed to be such pursuant to this
proviso) shall be considered as though such individual were a member of
the Incumbent Board; but, provided, further, that any such individual
whose initial assumption of office occurs as a result of either an
actual or threatened election contest (as such terms are used in Rule
14a-11 of Regulation 14A promulgated under the Exchange Act, including
any successor to such Rule), or other actual or threatened solicitation
of proxies or consents by or on behalf of a Person other than the
Board, shall not be so considered as a member of the Incumbent Board.
(d) Notwithstanding the provisions set forth in
subsections (a) and (b), the following shall not constitute a Change in
Control for purposes of this Agreement: (1) any acquisition of Shares
by, or consummation of a Corporate Transaction with, any Subsidiary or
any employee benefit plan (or related trust) sponsored or maintained by
the Company or an affiliate; or (2) any acquisition of Shares, or
consummation of a Corporate Transaction, following which more than
fifty percent (50%) of, respectively, the shares then outstanding of
common stock of the corporation resulting from such acquisition or
Corporate Transaction and the combined voting power of the voting
securities then outstanding of such corporation entitled to vote
generally in the election of directors is then beneficially owned,
directly or indirectly, by all or substantially all of the individuals
and entities who were Beneficial Owners, respectively, of the Company
Common Stock Outstanding and Company Voting Securities Outstanding
immediately prior to such acquisition or Corporate Transaction in
substantially the same proportions as their ownership, immediately
prior to such acquisition or Corporate Transaction, of the Company
Common Stock Outstanding and Company Voting Securities Outstanding, as
the case may be.
4. Change in Control Payments And Severance Payments.
(a) If a Change in Control of the Company occurs, the
Company shall pay or provide to Executive (subject to withholding of
applicable taxes) within ten (10) days after the date of the Change in
Control:
3
<PAGE> 4
(i) a lump sum amount equal to the sum of (A)
200% of his full base annual salary at the rate in effect on
the date prior to the date of the Change in Control, plus (B)
200% of the incentive payment Executive would have received
for the year during which the Change in Control occurs under
the Company's annual incentive plan, assuming the target level
of performance had been met for such year;
(ii) an amount equal to the product of (aa) the
annual incentive bonus that would be paid or payable to the
Executive for the year of termination under the Company's
annual incentive plan, assuming the target level of
performance had been met for such year, multiplied by (bb) a
fraction of which the numerator is the number of weeks that
have elapsed in the then current year through the date of the
Change in Control and the denominator is 52 (and Executive's
participation in such annual incentive plan for the year of
the Change in Control shall be terminated);
(iii) the amount of any annual or long-term bonus
with respect to any year that has then ended which has or
would have been earned and been paid to the Executive under
any annual or long-term bonus plan then in effect but which
has not yet been paid to him;
(iv) an additional contribution to any deferred
compensation or savings plan (whether qualified or
non-qualified) in which the Executive is participating, the
maximum amount which the Company is permitted to contribute,
based on the payments made pursuant to paragraphs (i), (ii)
and (iii) above, provided that if the contributions on the
Executive's behalf to the plans covered by this paragraph (iv)
are not permitted under the terms of one or more of such
plans, the Company shall pay Executive in a lump sum, within
10 days, the present value of the benefits that cannot be
provided pursuant to such plan; and
(v) accelerate to the date of the Change in
Control the vesting, exercisability, transferability and
payment date of all outstanding stock options, restricted
stock and any other share awards held by Executive.
(b) If a Change in Control of the Company occurs and,
subsequently on or before the third anniversary of such Change in
Control, the Executive's employment with the Company is terminated (i)
by the Company for any reason whatsoever other than for Cause (as
defined in subsection (c) below) or the Executive's death or Disability
(as defined in subsection (d) below), or (ii) by the Executive for Good
Reason (as defined in subsection (e) below), the Company shall:
4
<PAGE> 5
(A) pay to the Executive within 30 days after
the date of termination, an amount equal to the sum of:
(I) his full base salary through the
date of termination at the rate in effect at the time
notice of termination (as provided for in Section 5
below) is given, plus
(II) an amount equal to the product of
(aa) the number of unused vacation days accrued by
the Executive through the date of termination
multiplied by (bb) a fraction the numerator of which
is the Executive's base salary and the denominator of
which is 250;
(B) maintain in full force and effect for the
benefit of the Executive and his dependents for a period of
two years from the date of termination (or, if shorter, the
period until Executive obtains other employment and becomes
actually covered by a plan providing the specific benefit
hereinafter described) all employee life, medical, dental, and
vision coverages in which the Executive is participating at
the time of the Executive's termination; provided, that if the
Executive's continued participation is not permitted under the
general terms of such plans, the Company shall arrange to
provide him with substantially similar benefits and the
Company shall pay the cost of such benefits; provided further,
Executive will be required to pay the "employee portion" of
any costs of such coverages in the same amount as required for
active executive employees of the Company;
(c) For the purposes of this Section 4, "Cause" means:
(i) the conviction of the Executive of, or a plea of
guilty or nolo contendere by the Executive to, any felony
involving conduct on the part of the Executive that renders
him unfit for the performance of his duties to the Company, or
its subsidiaries and affiliates, or
(ii) any willful misconduct on the part of the
Executive in the performance of his duties that is materially
harmful to the Company or its subsidiaries or affiliates,
monetarily or otherwise.
For the purpose of this subsection (c), no act, or failure to
act, on the Executive's part shall be considered "willful" unless done,
or omitted to be done, by him not in good faith and without reasonable
belief that his action or omission was in the best interest of the
Company. Notwithstanding the foregoing, the Executive shall not be
deemed to have been terminated for Cause unless and until there shall
have
5
<PAGE> 6
been delivered to him a copy of a resolution duly adopted by the
affirmative vote of not less than three quarters of the entire
membership of the Board of Directors of the Company at a meeting of the
Board called and held for the purpose (after reasonable notice to him
and an opportunity for him, together with his counsel, to be heard
before the Board), finding that in the good faith opinion of the Board
he was guilty of conduct set forth above in clauses (i) or (ii) above
and specifying the particulars thereof in detail.
(d) For the purpose of this Section 4, "Disability" shall
be deemed to exist if, as a result of the Executive's incapacity due to
physical or mental illness, he shall have been absent from his duties
with the Company on a full-time basis for 150 consecutive calendar days
and within 30 days after he has received notice of termination pursuant
to Section 5 he has not returned to the performance of his duties on a
full-time basis.
(e) For the purposes of this Section 4, "Good Reason"
shall be deemed to exist under any of the following circumstances, but
only to the extent that they occur within the thirty-six month period
immediately after a Change in Control:
(i) The assignment to the Executive of any
duties inconsistent with his positions, duties,
responsibilities and status with the Company, its subsidiaries
and affiliates immediately prior to a Change in Control, or a
change in his reporting responsibilities, titles or offices
which were in effect immediately prior to a Change in Control,
or any removal of him from or any failure to re-elect him to
any of such positions, except in connection with the
termination of his employment by the Company for Cause or as a
result of his death or Disability or termination by him other
than for Good Reason.
(ii) A reduction by the Company in the
Executive's base salary as in effect on the date hereof or as
the same may be increased from time to time, or failure to
give him annual salary increases consistent with performance
review ratings as compared with other employees of the same or
similar rank.
(iii) A failure by the Company to continue giving
the Executive bonuses comparable to the amount of bonuses
given to him prior to the Change in Control.
(iv) The Company's requiring that the Executive
be based anywhere other than the Company's principal executive
offices in the Vail, Colorado area, except for required travel
on Company business to an extent substantially consistent with
his present business travel obligations, or in the event that
the Executive consents to any such relocations, the failure by
the Company to pay (or reimburse him for) all reasonable
moving expenses incurred by him.
6
<PAGE> 7
(v) The failure by the Company to continue in
full force and effect any benefit, retirement, savings or
compensation plan or any employee life, accident, disability,
medical, dental, vision or other employee welfare benefit plan
in which the Executive is participating at the time of a
Change in Control of the Company, the taking of any action by
the Company which would adversely affect his participation in
or materially reduce his benefits under any of such plans or
deprive him of any material fringe benefit or perquisite
(including but not limited to the provision of an automobile
and the payment of club dues) enjoyed by him at the time of
the Change in Control, or the failure by the Company to
provide him with the number of paid vacation days to which he
is then entitled in accordance with the normal vacation policy
in effect on the date hereof.
(vi) Any breach by the Company of its obligations
under this Agreement or any purported termination by the
Company of his employment which is not effected pursuant to a
notice of termination satisfying the requirements of Section 5
(and if applicable Section 4(c)); and for purposes of this
Agreement, no such purported termination shall be effective.
(f) The Company agrees that if the Executive's employment
is terminated and he is entitled to benefits under Section 4(a) and/or
Section 4(b), he shall not be required to mitigate damages by seeking
other employment, nor shall any amount he earns after his termination
of employment reduce the amount payable by the Company under this
Agreement (except as provided in paragraph (B) above relating to
benefit changes upon subsequent employment).
(g)
(i) Anything in this Agreement to the contrary
notwithstanding, in the event it shall be determined (as
hereafter provided) that any payment or distribution to or for
the Executive, whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or
pursuant to or by reason of any other agreement, policy, plan,
program or arrangement (including, without limitation, any
employment agreement, stock plan or salary continuation
agreement), or similar right (a "Payment"), would be subject
to the excise tax imposed by Section 4999 of the Code (or any
successor provisions thereto), or any interest or penalties
with respect to such excise tax (such excise tax, together
with any such interest and penalties, are hereafter
collectively referred to as the "Excise Tax"), then the
Executive shall be entitled to receive an additional payment
or payments (a "Gross-Up Payment") from the Company. The total
amount of the Gross-Up Payment shall be an amount such that,
after payment by (or on behalf of) the Executive of any Excise
Tax and all federal, state and other taxes (including any
interest or
7
<PAGE> 8
penalties imposed with respect to such taxes) imposed upon the
Gross-Up Payment, the remaining amount of the Gross-Up Payment
is equal to the Excise Tax imposed upon the Payments. For
purposes of clarity, the amount of the Gross-Up Payment shall
be that amount necessary to pay the Excise Tax in full and all
taxes assessed upon the Gross-Up Payment.
(ii) An initial determination as to whether a
Gross-Up Payment is required pursuant to this subsection (g)
and the amount of such Gross-Up Payment shall be made by an
accounting firm selected by the Company and reasonably
acceptable to the Executive which is then designated as one of
the five largest accounting firms in the United States (the
"Accounting Firm"). The Accounting Firm shall provide its
determination (the "Determination"), together with detailed
supporting calculations and documentation to the Company and
the Executive as promptly as practicable after such
calculation is requested by the Company or by the Executive,
and if the Accounting Firm determines that no Excise Tax is
payable by the Executive with respect to a Payment or
Payments, it shall furnish the Executive with an opinion
reasonably acceptable to the Executive that no Excise Tax will
be imposed with respect to any such Payment or Payments.
Within fifteen (15) days of the delivery of the Determination
to the Executive, the Executive shall have the right to
dispute the Determination (the "Dispute"). The Gross-Up
Payment, if any, as determined pursuant to this Section 4
shall be paid by the Company to the Executive within fifteen
(15) days of the receipt of the Accounting Firm's
Determination. The existence of the Dispute shall not in any
way affect the right of the Executive to receive the Gross-Up
Payment in accordance with the Determination. If there is no
Dispute, the Determination shall be binding, final and
conclusive upon the Company and the Executive subject to the
application of subsection (iii) below.
(iii) As a result of the uncertainty in the
application of Sections 4999 and 280G of the Code, it is
possible that a Gross-Up Payment (or a portion thereof) will
be paid which should not have been paid (an "Excess Payment")
or a Gross-Up Payment (or a portion thereof) which should have
been paid will not have been paid (an "Underpayment"). An
Underpayment shall be deemed to have occurred upon the
earliest to occur of the following events: (1) upon notice
(formal or informal) to the Executive from any governmental
taxing authority that the tax liability of the Executive
(whether in respect of the then current taxable year of the
Executive or in respect of any prior taxable year of the
Executive) may be increased by reason of the imposition of the
Excise Tax on a Payment or Payments with respect to which the
Company has failed to make a sufficient Gross-Up Payment, (2)
upon a determination by a court, (3) by reason of a
determination by the Company (which shall include
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the position taken by the Company, or its consolidated group,
on its federal income tax return), or (4) upon the resolution
to the satisfaction of the Executive of the Dispute. If any
Underpayment occurs, the Executive shall promptly notify the
Company and the Company shall pay to the Executive within
fifteen (15) days of the date the Underpayment is deemed to
have occurred under (1), (2), (3) or (4) above, but in no
event less than five days prior to the date on which the
applicable government taxing authority has requested payment,
an additional Gross-Up Payment equal to the amount of the
Underpayment plus any interest and penalties imposed on the
Underpayment.
An Excess Payment shall be deemed to have occurred
upon a "Final Determination" (as hereinafter defined) that the
Excise Tax shall not be imposed upon a Payment or Payments (or
portion of a Payment) with respect to which the Executive had
previously received a Gross-Up Payment. A Final Determination
shall be deemed to have occurred when the Executive has
received from the applicable government taxing authority a
refund of taxes or other reduction in his tax liability by
reason of the Excess Payment and upon either (1) the date a
determination is made by, or an agreement is entered into
with, the applicable governmental taxable authority which
finally and conclusively binds the Executive and such taxing
authority, or in the event that a claim is brought before a
court of competent jurisdiction, the date upon which a final
determination has been made by such court and either all
appeals have been taken and finally resolved or the time for
all appeals has expired, or (2) the statute of limitations
with respect to the Executive's applicable tax return has
expired. If an Excess Payment is determined to have been made,
the amount of the Excess Payment shall be treated as a loan by
the Company to the Executive and the Executive shall pay to
the Company within 15 days following demand (but not less than
30 days after the determination of such Excess Payment) the
amount of the Excess Payment plus interest at an annual rate
equal to the rate provided for in Section 1274(b)(2)(B) of the
Code from the date the Gross-Up Payment (to which the Excess
Payment relates) was paid to the Executive until the date of
repayment to the Company.
(iv) Notwithstanding anything contained in this
Agreement to the contrary, in the event that, according to the
Determination, an Excise Tax will be imposed on any Payment or
Payments, the Company shall pay to the applicable government
taxing authorities as Excise Tax withholding, the amount of
any Excise Tax that the Company has actually withheld from the
Payment or Payments; provided that the Company's payment of
withheld Excise Tax shall not change the Company's obligation
to pay the Gross-Up Payment required under this subsection
(g).
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(v) The Executive and the Company shall each
provide the Accounting Firm access to and copies of any books,
records and documents in the possession of the Company or the
Executive, as the case may be, reasonably requested by the
Accounting Firm, and otherwise cooperate with the Accounting
Firm in connection with the preparation and issuance of the
Determination contemplated by subsection (ii) hereof.
(vi) The fees and expenses of the Accounting Firm
for its services in connection with the determinations and
calculations contemplated by subsection (ii) shall be paid by
the Company.
5. Notice of Termination. Any termination by the Company or by
the Executive of the Executive's employment by the Company shall he communicated
by a written notice of termination to the other party, and shall specify the
provision of this Agreement relied upon and shall set forth in reasonable detail
the circumstances claimed to provide a basis for termination. The date of
termination shall be the date on which the notice of termination is delivered if
by the Executive or 30 days after the date of the notice of termination if given
by the Company.
6. Litigation Expenses; Indemnification and Insurance.
(a) The Company shall pay all reasonable legal fees and
expenses incurred by the Executive as a result of his seeking to obtain
or enforce any right or benefit provided by this Agreement, promptly
and from time to time at his request as such fees and expenses are
incurred, regardless of whether such rights are pursued through
settlement discussions, mediation, arbitration, litigation or
otherwise.
(b) Unless the Executive is terminated for Cause, at all
times after a Change of Control the Company shall continue to provide
for Executive the indemnification provisions contained in the Company's
by-laws and shall continue to maintain for the benefit of the Executive
such policies of liability insurance, providing protection to him as an
officer, director, agent or employee of the Company and its
subsidiaries, as may from time to time be purchased by the Company for
officers and directors generally as authorized by or in furtherance of
the indemnification provisions contained in the Company's by-laws.
Unless the Executive is terminated for Cause, neither the insurance nor
the Executive's right to indemnification thereunder may be canceled by
the Company without his permission for a period of five years following
the date of termination under this Agreement; provided, however, that
the Company may obtain a substitute insurance policy as long as the
rights of indemnity to the Executive are at least equivalent to the
most favorable rights provided under the policies in effect immediately
prior to the date of a Change of Control.
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7. Assignment; Successors in Interest.
(a) General. Except with the prior written consent of the
Executive, no assignment by operation of law or otherwise by the
Company of any of its rights and obligations under this Agreement may
be made other than to an entity which is a successor to all or a
substantial portion of the business of the Company (but then only if
such entity assumes by operation of law or by specific assumption
executed by the transferee and delivered to the Executive all
obligations and liabilities of the Company under this Agreement); no
transfer by operation of law or otherwise by the Company of all or a
substantial part of its business or assets shall be made unless the
obligations and liabilities of the Company under this Agreement are
assumed in connection with such transfer either by operation of law or
by specific assumption executed by the transferee. In such event, the
Company shall remain liable for the performance of all of its
obligations under this Agreement (which liability shall be a primary
obligation for full and prompt performance rather than a secondary
guarantee of collectibility of damages). Except for any transfer or
assignment of rights under this Agreement, in whole or in part, upon
the death of the Executive to his heirs, devisees, legatees or
beneficiaries or except with the prior written consent of the Company,
no assignment or transfer by operation of law or otherwise may be made
by the Executive of any of his rights under this Agreement.
(b) Binding Nature. This Agreement shall be binding upon
the parties to this Agreement and their respective legal
representatives, heirs, devisees, legatees, beneficiaries and
successors and assigns; shall inure to the benefit of the parties to
this Agreement and their respective permitted legal representatives,
heirs, devisees, legatees, beneficiaries and other permitted successors
and assigns (and to or for the benefit of no other person or entity,
whether an employee or otherwise, whatsoever); and any reference to a
party to this Agreement shall also be a reference to a permitted
successor or assign.
8. Miscellaneous.
(a) The failure of any party to this Agreement at any
time or times to require performance of any provision of this Agreement
shall in no manner affect the right to enforce the same. No waiver by
any party to this Agreement of any provision (or of a breach of any
provision) of this Agreement, whether by conduct or otherwise, in any
one or more instances shall be deemed or construed either as a further
or continuing waiver of any such provision or breach or as a waiver of
any other provision (or of a breach of any other provision) of this
Agreement.
(b) Wherever possible each provision of this Agreement
shall be interpreted in such manner as to be effective and valid but if
any one or more of the provisions of this Agreement shall be invalid,
illegal or unenforceable in any respect
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for any reason, the validity, legality or enforceability of any such
provisions in every other respect and of the remaining provisions of
this Agreement shall not be impaired.
(c) This Agreement shall be governed by and interpreted
in accordance with the laws of the State of Colorado (without giving
effect to any choice of law provisions).
(d) This Agreement may only be amended by a written
instrument signed by the parties hereto which makes specific reference
to the Agreement.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its duly authorized officer and the Executive has executed this
Agreement as of the date and year first written above.
VAIL BANKS, INC.
By: /s/ Lisa M. Dillon
------------------------
EXECUTIVE
/s/ E.B. Chester
-----------------------------
Name: E. B. CHESTER
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EXHIBIT 10.4
CHANGE IN CONTROL
SEVERANCE PAYMENT AGREEMENT
This Agreement, made and entered into as of the 19th day of November,
1999, by and between VAIL BANKS, INC., an Colorado corporation (the "Company"),
and LISA M. DILLON (hereinafter called the "Executive"),
W I T N E S S E T H:
WHEREAS, the Executive is currently employed by the Company and certain
of its subsidiaries in various capacities and is rendering valuable services to
the Company and such subsidiaries; and
WHEREAS, the Company desires to retain the Executive and is aware that
the possibility of a Change in Control of the Company (as defined in Section 3)
might impede the accomplishment of this end; and
WHEREAS, the Company wishes to induce the Executive to remain in his
present employment and believes that the execution of this Agreement will
further its aim in retaining the Executive during an actual or attempted Change
in Control and will tend to assure fair treatment of executives in the event of
a Change in Control; and
WHEREAS, the Company wishes to provide certain rights to the Executive
in the event of the termination of his employment under certain circumstances;
NOW, THEREFORE, for and in consideration of the premises and of the
Executive's continuation in his present employment with the Company, the parties
hereto agree as follows:
1. Duties and Status of Executive.
The Executive shall continue to perform such duties and
responsibilities as shall be assigned to him by the Board of Directors of the
Company. The Executive shall devote his working time and attention to the
discharge of his duties with the Company and its subsidiaries. In addition to
the compensation and other benefits provided the Executive by the Company, the
Executive shall have the additional benefits provided by this Agreement.
2. Term.
(a) Initial Term. The term of this Agreement shall initially
be a fixed period of two years that expires on the second anniversary
of the date of this Agreement and may be extended as provided in
subsection (b) below.
<PAGE> 2
(b) Extension. The term of this Agreement shall be extended
automatically on the first anniversary and on each subsequent
anniversary of the date of this Agreement (each such anniversary being
referred to as an "Extension Date") for an additional one year period
so that the Agreement then expires on the second anniversary of the
applicable Extension Date; provided that
(i) the then current term of this Agreement will not
be extended on any Extension Date if,
(A) not later than 90 days before such
Extension Date the Company gives the Executive
written notice that it does not wish to extend the
term, or
(B) before such Extension Date the Company
terminates the employment of the Executive for Cause
(as defined in Section 4(b), and
(ii) whether or not the Company has given notice to
the Executive pursuant to clause (i) (A) above that it does
not wish to extend the term of this Agreement, if a Change in
Control occurs during the initial term of this Agreement, or
any extension thereof, the term of this Agreement shall not
expire sooner than the third anniversary of the date of such
Change in Control.
3. Change in Control. For the purposes of this Agreement, a
"Change in Control" shall be deemed to have occurred in the event of:
(a) an acquisition by any Person of Beneficial Ownership of
the Shares of the Company then outstanding (the "Company Common Stock
Outstanding") or the voting securities of the Company then outstanding
entitled to vote generally in the election of directors (the "Company
Voting Securities Outstanding"), if such acquisition of Beneficial
Ownership results in the Person beneficially owning (within the meaning
of Rule 13d-3 promulgated under the Exchange Act) twenty-five percent
(25%) or more of the Company Common Stock Outstanding or twenty-five
percent (25%) or more of the combined voting power of the Company
Voting Securities Outstanding; provided, that immediately prior to such
acquisition such Person was not a direct or indirect Beneficial Owner
of twenty-five percent (25%) or more of the Company Common Stock
Outstanding or twenty-five percent (25%) or more of the combined voting
power of Company Voting Securities Outstanding, as the case may be; or
(b) the approval by the shareholders of the Company of a
reorganization, merger, consolidation, complete liquidation or
dissolution of the Company, the sale or disposition of all or
substantially all of the assets of the Company or similar corporate
transaction (in each case referred to in this Section 3 as a "Corporate
Transaction")
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or, if consummation of such Corporate Transaction is subject, at the
time of such approval by shareholders, to the consent of any government
or governmental agency, the obtaining of such consent (either
explicitly or implicitly); or
(c) a change in the composition of the Board such that the
individuals who, as of the date of this Agreement, constitute the Board
(such Board shall be hereinafter referred to as the "Incumbent Board")
cease for any reason to constitute at least a majority of the Board;
provided, however, for purposes of this Section 3 that any individual
who becomes a member of the Board subsequent to the date of this
Agreement whose election, or nomination for election by the Company's
shareholders, was approved by a vote of at least a majority of those
individuals who are members of the Board and who were also members of
the Incumbent Board (or deemed to be such pursuant to this proviso)
shall be considered as though such individual were a member of the
Incumbent Board; but, provided, further, that any such individual whose
initial assumption of office occurs as a result of either an actual or
threatened election contest (as such terms are used in Rule 14a-11 of
Regulation 14A promulgated under the Exchange Act, including any
successor to such Rule), or other actual or threatened solicitation of
proxies or consents by or on behalf of a Person other than the Board,
shall not be so considered as a member of the Incumbent Board.
(d) Notwithstanding the provisions set forth in subsections
(a) and (b), the following shall not constitute a Change in Control for
purposes of this Agreement: (1) any acquisition of Shares by, or
consummation of a Corporate Transaction with, any Subsidiary or any
employee benefit plan (or related trust) sponsored or maintained by the
Company or an affiliate; or (2) any acquisition of Shares, or
consummation of a Corporate Transaction, following which more than
fifty percent (50%) of, respectively, the shares then outstanding of
common stock of the corporation resulting from such acquisition or
Corporate Transaction and the combined voting power of the voting
securities then outstanding of such corporation entitled to vote
generally in the election of directors is then beneficially owned,
directly or indirectly, by all or substantially all of the individuals
and entities who were Beneficial Owners, respectively, of the Company
Common Stock Outstanding and Company Voting Securities Outstanding
immediately prior to such acquisition or Corporate Transaction in
substantially the same proportions as their ownership, immediately
prior to such acquisition or Corporate Transaction, of the Company
Common Stock Outstanding and Company Voting Securities Outstanding, as
the case may be.
4. Severance Payments.
(a) If a Change in Control of the Company occurs and, within
six months prior to such Change in Control in connection with the
Change in Control, or subsequently on or before the third anniversary
of such Change in Control, the Executive's
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employment with the Company is terminated (i) by the Company for any
reason whatsoever other than for Cause (as defined in subsection (b)
below) or because of the Executive's death or Disability (as defined in
subsection (c) below), or (ii) by the Executive for Good Reason (as
defined in subsection (d) below), the Company shall:
(A) pay to the Executive within 30 days
after the date of termination, an amount equal to the
sum of:
(I) his full base salary through the
date of termination at the rate in effect at
the time notice of termination (as provided
for in Section 5 below) is given, plus
(II) the amount of any annual or
long-term bonus with respect to any year
that has then ended which has or would have
been earned and been paid to the Executive
under any annual or long-term bonus plan
then in effect but which has not yet been
paid to him, plus
(III) an amount equal to the product
of (aa) the annual bonus that would be paid
or payable to the Executive for the year of
termination under the Company's annual
incentive plan, assuming the target level of
performance had been met for such year,
multiplied by (bb) a fraction of which the
numerator is the number of weeks that have
elapsed in the then current year through the
date of termination and the denominator is
52, plus
(IV) an amount equal to the product
of (aa) the number of unused vacation days
accrued by the Executive through the date of
termination multiplied by (bb) a fraction
the numerator of which is the Executive's
base salary and the denominator of which is
250;
(B) provide for an additional contribution
to any deferred compensation or savings plan (whether
qualified or non-qualified) in which the Executive is
participating, within 30 days after his date of
termination, the maximum amount which the Company is
permitted to contribute based on the payments made
pursuant to paragraph (A) above, provided that if the
Executive's continued participation in the plans
covered by this paragraph (B) is not permitted under
the terms of one or more of such plans, the Company
shall pay Executive in a lump sum, within thirty days
after the date of termination, the present value of
the benefit that cannot be provided pursuant to such
plan;
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(C) pay to the Executive within 30 days
after the date of termination, a severance payment in
an amount equal to the sum of (i) 200% of his full
base annual salary at the rate in effect at the time
notice of termination is given, plus (ii) 200% of the
incentive payment the Executive would have received
for the year of termination under the annual
incentive plan, assuming the target level of
performance had been met for such year;
(D) maintain in full force and effect for
the benefit of the Executive and his dependents for a
period of two years from the date of termination (or,
if shorter, the period until Executive obtains other
employment and becomes actually covered by a plan
providing the specific benefit hereinafter described)
all employee life, medical, dental, and vision
coverages in which the Executive is participating at
the time of the Executive's termination; provided,
that if the Executive's continued participation is
not permitted under the general terms of such plans,
the Company shall arrange to provide him with
substantially similar benefits and the Company shall
pay the cost of such benefits; provided further,
Executive will be required to pay the "employee
portion" of any costs of such coverages in the same
amount as required for active executive employees of
the Company;
(E) accelerate to Executive's date of
termination the vesting, exercisability,
transferability and payment date of all outstanding
stock options, restricted stock and any other share
awards held by Executive.
(b) For the purposes of this Section 4, "Cause" means:
(i) the conviction of the Executive of, or a plea of
guilty or nolo contendere by the Executive to, any felony
involving conduct on the part of the Executive that renders
him unfit for the performance of his duties to the Company, or
its subsidiaries and affiliates, or
(ii) any willful misconduct on the part of the
Executive in the performance of his duties that is materially
harmful to the Company or its subsidiaries or affiliates,
monetarily or otherwise.
For the purpose of this subsection (b), no act, or failure to act, on
the Executive's part shall be considered "willful" unless done, or
omitted to be done, by him not in good faith and without reasonable
belief that his action or omission was in the best interest of the
Company. Notwithstanding the foregoing, the Executive shall not be
deemed to have been terminated for Cause unless and until there shall
have been delivered to him a copy of a resolution duly adopted by the
affirmative vote of not less than three
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quarters of the entire membership of the Board of Directors of the
Company at a meeting of the Board called and held for the purpose
(after reasonable notice to him and an opportunity for him, together
with his counsel, to be heard before the Board), finding that in the
good faith opinion of the Board he was guilty of conduct set forth
above in clauses (i) or (ii) above and specifying the particulars
thereof in detail.
(c) For the purpose of this Section 4, "Disability" shall be
deemed to exist if, as a result of the Executive's incapacity due to
physical or mental illness, he shall have been absent from his duties
with the Company on a full-time basis for 150 consecutive calendar days
and within 30 days after he has received notice of termination pursuant
to Section 5 he has not returned to the performance of his duties on a
full-time basis.
(d) For the purposes of this Section 4, "Good Reason" shall be
deemed to exist under any of the following circumstances, but only to
the extent that they occur within the six month period immediately
prior to or after a Change in Control:
(i) The assignment to the Executive of any duties
inconsistent with his positions, duties, responsibilities and
status with the Company, its subsidiaries and affiliates
immediately prior to a Change in Control, or a change in his
reporting responsibilities, titles or offices which were in
effect immediately prior to a Change in Control, or any
removal of him from or any failure to re-elect him to any of
such positions, except in connection with the termination of
his employment by the Company for Cause or as a result of his
death or Disability or termination by him other than for Good
Reason.
(ii) A reduction by the Company in the Executive's
base salary as in effect on the date hereof or as the same may
be increased from time to time, or failure to give him annual
salary increases consistent with performance review ratings as
compared with other employees of the same or similar rank.
(iii) A failure by the Company to continue giving the
Executive bonuses comparable to the amount of bonuses given to
him prior to the Change in Control.
(iv) The Company's requiring that the Executive be
based anywhere other than the Company's principal executive
offices in the Vail, Colorado area, except for required travel
on Company business to an extent substantially consistent with
his present business travel obligations, or in the event that
the Executive consents to any such relocations, the failure by
the Company to pay (or reimburse him for) all reasonable
moving expenses incurred by him.
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(v) The failure by the Company to continue in full
force and effect any benefit, retirement, savings or
compensation plan or any employee life, accident, disability,
medical, dental, vision or other employee welfare benefit plan
in which the Executive is participating at the time of a
Change in Control of the Company, the taking of any action by
the Company which would adversely affect his participation in
or materially reduce his benefits under any of such plans or
deprive him of any material fringe benefit or perquisite
(including but not limited to the provision of an automobile
and the payment of club dues) enjoyed by him at the time of
the Change in Control, or the failure by the Company to
provide him with the number of paid vacation days to which he
is then entitled in accordance with the normal vacation policy
in effect on the date hereof.
(vi) Any breach by the Company of its obligations
under this Agreement or any purported termination by the
Company of his employment which is not effected pursuant to a
notice of termination satisfying the requirements of Section 5
(and if applicable Section 4(b)); and for purposes of this
Agreement, no such purported termination shall be effective.
(e) The Company agrees that if the Executive's employment is
terminated and he is entitled to benefits under Section 4(a), he shall
not be required to mitigate damages by seeking other employment, nor
shall any amount he earns after his termination of employment reduce
the amount payable by the Company under this Agreement (except as
provided in paragraph (D) bove relating to benefit changes upon
subsequent employment).
(f)(i) Anything in this Agreement to the contrary
notwithstanding, in the event it shall be determined (as
hereafter provided) that any payment or distribution to or for
the Executive, whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or
pursuant to or by reason of any other agreement, policy, plan,
program or arrangement (including, without limitation, any
employment agreement, stock plan or salary continuation
agreement), or similar right (a "Payment"), would be subject
to the excise tax imposed by Section 4999 of the Code (or any
successor provisions thereto), or any interest or penalties
with respect to such excise tax (such excise tax, together
with any such interest and penalties, are hereafter
collectively referred to as the "Excise Tax"), then the
Executive shall be entitled to receive an additional payment
or payments (a "Gross-Up Payment") from the Company. The total
amount of the Gross-Up Payment shall be an amount such that,
after payment by (or on behalf of) the Executive of any Excise
Tax and all federal, state and other taxes (including any
interest or penalties imposed with respect to such taxes)
imposed upon the Gross-Up
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Payment, the remaining amount of the Gross-Up Payment is equal
to the Excise Tax imposed upon the Payments. For purposes of
clarity, the amount of the Gross-Up Payment shall be that
amount necessary to pay the Excise Tax in full and all taxes
assessed upon the Gross-Up Payment.
(ii) An initial determination as to whether a
Gross-Up Payment is required pursuant to this subsection (f)
and the amount of such Gross-Up Payment shall be made by an
accounting firm selected by the Company and reasonably
acceptable to the Executive which is then designated as one of
the five largest accounting firms in the United States (the
"Accounting Firm"). The Accounting Firm shall provide its
determination (the "Determination"), together with detailed
supporting calculations and documentation to the Company and
the Executive as promptly as practicable after such
calculation is requested by the Company or by the Executive,
and if the Accounting Firm determines that no Excise Tax is
payable by the Executive with respect to a Payment or
Payments, it shall furnish the Executive with an opinion
reasonably acceptable to the Executive that no Excise Tax will
be imposed with respect to any such Payment or Payments.
Within fifteen (15) days of the delivery of the Determination
to the Executive, the Executive shall have the right to
dispute the Determination (the "Dispute"). The Gross-Up
Payment, if any, as determined pursuant to this Section 4
shall be paid by the Company to the Executive within fifteen
(15) days of the receipt of the Accounting Firm's
Determination. The existence of the Dispute shall not in any
way affect the right of the Executive to receive the Gross-Up
Payment in accordance with the Determination. If there is no
Dispute, the Determination shall be binding, final and
conclusive upon the Company and the Executive subject to the
application of subsection (iii) below.
(iii) As a result of the uncertainty in the
application of Sections 4999 and 280G of the Code, it is
possible that a Gross-Up Payment (or a portion thereof) will
be paid which should not have been paid (an "Excess Payment")
or a Gross-Up Payment (or a portion thereof) which should have
been paid will not have been paid (an "Underpayment"). An
Underpayment shall be deemed to have occurred upon the
earliest to occur of the following events: (1) upon notice
(formal or informal) to the Executive from any governmental
taxing authority that the tax liability of the Executive
(whether in respect of the then current taxable year of the
Executive or in respect of any prior taxable year of the
Executive) may be increased by reason of the imposition of the
Excise Tax on a Payment or Payments with respect to which the
Company has failed to make a sufficient Gross-Up Payment, (2)
upon a determination by a court, (3) by reason of a
determination by the Company (which shall include the position
taken by the Company, or its consolidated group, on its
federal
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income tax return), or (4) upon the resolution to the
satisfaction of the Executive of the Dispute. If any
Underpayment occurs, the Executive shall promptly notify the
Company and the Company shall pay to the Executive within
fifteen (15) days of the date the Underpayment is deemed to
have occurred under (1), (2), (3) or (4) above, but in no
event less than five days prior to the date on which the
applicable government taxing authority has requested payment,
an additional Gross-Up Payment equal to the amount of the
Underpayment plus any interest and penalties imposed on the
Underpayment.
An Excess Payment shall be deemed to have occurred
upon a "Final Determination" (as hereinafter defined) that the
Excise Tax shall not be imposed upon a Payment or Payments (or
portion of a Payment) with respect to which the Executive had
previously received a Gross-Up Payment. A Final Determination
shall be deemed to have occurred when the Executive has
received from the applicable government taxing authority a
refund of taxes or other reduction in his tax liability by
reason of the Excess Payment and upon either (1) the date a
determination is made by, or an agreement is entered into
with, the applicable governmental taxable authority which
finally and conclusively binds the Executive and such taxing
authority, or in the event that a claim is brought before a
court of competent jurisdiction, the date upon which a final
determination has been made by such court and either all
appeals have been taken and finally resolved or the time for
all appeals has expired, or (2) the statute of limitations
with respect to the Executive's applicable tax return has
expired. If an Excess Payment is determined to have been made,
the amount of the Excess Payment shall be treated as a loan by
the Company to the Executive and the Executive shall pay to
the Company within 15 days following demand (but not less than
30 days after the determination of such Excess Payment) the
amount of the Excess Payment plus interest at an annual rate
equal to the rate provided for in Section 1274(b)(2)(B) of the
Code from the date the Gross-Up Payment (to which the Excess
Payment relates) was paid to the Executive until the date of
repayment to the Company.
(iv) Notwithstanding anything contained in this
Agreement to the contrary, in the event that, according to the
Determination, an Excise Tax will be imposed on any Payment or
Payments, the Company shall pay to the applicable government
taxing authorities as Excise Tax withholding, the amount of
any Excise Tax that the Company has actually withheld from the
Payment or Payments; provided that the Company's payment of
withheld Excise Tax shall not change the Company's obligation
to pay the Gross-Up Payment required under this subsection
(f).
9
<PAGE> 10
(v) The Executive and the Company shall each provide
the Accounting Firm access to and copies of any books, records
and documents in the possession of the Company or the
Executive, as the case may be, reasonably requested by the
Accounting Firm, and otherwise cooperate with the Accounting
Firm in connection with the preparation and issuance of the
Determination contemplated by subsection (ii) hereof.
(vi) The fees and expenses of the Accounting Firm for
its services in connection with the determinations and
calculations contemplated by subsection (ii) shall be paid by
the Company.
5. Notice of Termination. Any termination by the Company or by
the Executive of the Executive's employment by the Company shall he communicated
by a written notice of termination to the other party, and shall specify the
provision of this Agreement relied upon and shall set forth in reasonable detail
the circumstances claimed to provide a basis for termination. The date of
termination shall be the date on which the notice of termination is delivered if
by the Executive or 30 days after the date of the notice of termination if given
by the Company.
6. Litigation Expenses; Indemnification and insurance.
(a) The Company shall pay all reasonable legal fees and
expenses incurred by the Executive as a result of his seeking to obtain
or enforce any right or benefit provided by this Agreement, promptly
and from time to time at his request as such fees and expenses are
incurred, regardless of whether such rights are pursued through
settlement discussions, mediation, arbitration, litigation or
otherwise.
(b) Unless the Executive is terminated for Cause, at all times
after a Change of Control the Company shall continue to provide for
Executive the indemnification provisions contained in the Company's
by-laws and shall continue to maintain for the benefit of the Executive
such policies of liability insurance, providing protection to him as an
officer, director, agent or employee of the Company and its
subsidiaries, as may from time to time be purchased by the Company for
officers and directors generally as authorized by or in furtherance of
the indemnification provisions contained in the Company's by-laws.
Unless the Executive is terminated for Cause, neither the insurance nor
the Executive's right to indemnification thereunder may be canceled by
the Company without his permission for a period of five years following
the date of termination under this Agreement; provided, however, that
the Company may obtain a substitute insurance policy as long as the
rights of indemnity to the Executive are at least equivalent to the
most favorable rights provided under the policies in effect immediately
prior to the date of a Change of Control.
10
<PAGE> 11
7. Assignment; Successors in Interest.
(a) General. Except with the prior written consent of the
Executive, no assignment by operation of law or otherwise by the
Company of any of its rights and obligations under this Agreement may
be made other than to an entity which is a successor to all or a
substantial portion of the business of the Company (but then only if
such entity assumes by operation of law or by specific assumption
executed by the transferee and delivered to the Executive all
obligations and liabilities of the Company under this Agreement); no
transfer by operation of law or otherwise by the Company of all or a
substantial part of its business or assets shall be made unless the
obligations and liabilities of the Company under this Agreement are
assumed in connection with such transfer either by operation of law or
by specific assumption executed by the transferee. In such event, the
Company shall remain liable for the performance of all of its
obligations under this Agreement (which liability shall be a primary
obligation for full and prompt performance rather than a secondary
guarantee of collectibility of damages). Except for any transfer or
assignment of rights under this Agreement, in whole or in part, upon
the death of the Executive to his heirs, devisees, legatees or
beneficiaries or except with the prior written consent of the Company,
no assignment or transfer by operation of law or otherwise may be made
by the Executive of any of his rights under this Agreement.
(b) Binding Nature. This Agreement shall be binding upon the
parties to this Agreement and their respective legal representatives,
heirs, devisees, legatees, beneficiaries and successors and assigns;
shall inure to the benefit of the parties to this Agreement and their
respective permitted legal representatives, heirs, devisees, legatees,
beneficiaries and other permitted successors and assigns (and to or for
the benefit of no other person or entity, whether an employee or
otherwise, whatsoever); and any reference to a party to this Agreement
shall also be a reference to a permitted successor or assign.
8. Miscellaneous.
(a) The failure of any party to this Agreement at any time or
times to require performance of any provision of this Agreement shall
in no manner affect the right to enforce the same. No waiver by any
party to this Agreement of any provision (or of a breach of any
provision) of this Agreement, whether by conduct or otherwise, in any
one or more instances shall be deemed or construed either as a further
or continuing waiver of any such provision or breach or as a waiver of
any other provision (or of a breach of any other provision) of this
Agreement.
(b) Wherever possible each provision of this Agreement shall
be interpreted in such manner as to be effective and valid but if any
one or more of the provisions of this Agreement shall be invalid,
illegal or unenforceable in any respect
11
<PAGE> 12
for any reason, the validity, legality or enforceability of any such
provisions in every other respect and of the remaining provisions of
this Agreement shall not be impaired.
(c) This Agreement shall be governed by and interpreted in
accordance with the laws of the State of Colorado (without giving
effect to any choice of law provisions).
(d) This Agreement may only be amended by a written instrument
signed by the parties hereto which makes specific reference to the
Agreement.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its duly authorized officer and the Executive has executed this
Agreement as of the date and year first written above.
VAIL BANKS, INC.
By: /s/ E.B. Chester
---------------------------
EXECUTIVE
/s/ Lisa M. Dillon
-------------------------------
Name: LISA M. DILLON
12
<PAGE> 1
EXHIBIT 10.5
VAIL BANKS, INC.
AMENDED AND RESTATED STOCK INCENTIVE PLAN
RESTRICTED STOCK AWARD AGREEMENT
THIS AGREEMENT, made and entered into as of the 19th day of November,
1999, by and between VAIL BANKS, INC. ("the "Company") and LISA M. DILLON
("Grantee").
WITNESSETH THAT:
WHEREAS, the Company maintains the Vail Banks, Inc. Amended and
Restated Stock Incentive Plan (the "Plan"), and the Grantee has been selected by
the Committee to receive a Restricted Stock Award under the Plan;
NOW, THEREFORE, IT IS AGREED, by and between the Company and the
Grantee, as follows:
1. AWARD OF RESTRICTED STOCK
1.1 The Company hereby grants to the Grantee an award of 10,476 Shares
of restricted stock ("Restricted Stock"), subject to, and in accordance with,
the restrictions, terms and conditions set forth in this Agreement. The grant
date of this award of Restricted Stock is November 19, 1999 ("Grant Date").
1.2 This Agreement shall be construed in accordance and consistent
with, and subject to, the provisions of the Plan (the provisions of which are
incorporated herein by reference) and, except as otherwise expressly set forth
herein, the capitalized terms used in this Agreement shall have the same
definitions as set forth in the Plan.
2. RESTRICTIONS
2.1 Subject to Sections 2.2, 2.3, and 2.4 below, if the Grantee remains
employed by the Company, the Grantee shall become vested in the Restricted Stock
as follows: 10% of the Shares of Restricted Stock (rounded down to the next
whole share) shall vest on each anniversary (each such date shall be a "Vesting
Date") of the Grant Date, such that on November 19, 2009 ("Final Vesting Date")
all of the Shares of Restricted Stock shall be fully vested. On each Vesting
Date, Grantee shall own the Vested Shares of Restricted Stock free and clear of
all restrictions imposed by this Agreement (except those imposed by Section 3.4
below). The Company shall deliver a certificate(s) for the Vested Shares of
Restricted Stock to Grantee as soon as practical after each Vesting Date. For
purposes of this Agreement, employment with any
<PAGE> 2
Subsidiary of the Company, or service as a Director of the Company or any
Subsidiary of the Company, shall be considered employment with the Company.
2.2 In the event, prior to the Final Vesting Date, (i) Grantee dies
while actively employed by the Company, (ii) Grantee has his employment
terminated by reason of Disability, (iii) Grantee's employment is terminated by
the Company other than for Cause (as defined in Section 2(e) of the Plan),or
(iv) Grantee terminates his employment for Good Reason (as defined in Section
2.5 below), the Restricted Stock shall become fully vested and nonforfeitable as
of the date of Grantee's death, Disability or termination of employment. The
Company shall deliver certificate(s) for the Restricted Stock, free and clear of
any restrictions imposed by this Agreement (except for Section 3.4) to Grantee
(or, in the event of death, his surviving spouse or, if none, to his estate) as
soon as practical after his date of death or termination for Disability,
termination without Cause, or termination for Good Reason. If Grantee terminates
his employment without Good Reason or if the Company terminates Grantee for
Cause, the Restricted Stock shall cease to vest further and Grantee shall only
be entitled to the Restricted Stock that is vested as of his date of
termination.
2.3 Notwithstanding the other provisions of this Agreement, in the
event of a Change in Control prior to Grantee's Final Vesting Date, the
Restricted Stock shall become fully vested and nonforfeitable as of the date of
the Change in Control. On the date of the Change in Control, the Company shall
deliver to Grantee a certificate(s) for the Restricted Stock, free and clear of
any restrictions imposed by this Agreement.
2.4 The Restricted Stock may not be sold, assigned, transferred,
pledged or otherwise encumbered prior to the date Grantee becomes vested in the
Restricted Stock.
2.5 For purposes of this Section 2, "Good Reason" shall mean
(i) the assignment to the Executive of any duties inconsistent
with his positions, duties, responsibilities and status with the
Company, its subsidiaries and affiliates immediately prior to a Change
in Control, or a change in his reporting responsibilities, titles or
offices which were in effect immediately prior to a Change in Control,
or any removal of him from or any failure to re-elect him to any of
such positions, except in connection with the termination of his
employment by the Company for Cause or as a result of his death or
Disability or termination by him other than for Good Reason;
(ii) a reduction by the Company in the Executive's base salary
as in effect on the date hereof or as the same may be increased from
time to time, or failure to give him annual salary increases consistent
with performance review ratings as compared with other employees of the
same or similar rank;
(iii) a failure by the Company to continue giving the
Executive bonuses comparable to the amount of bonuses given to him
prior to the Change in Control;
2
<PAGE> 3
(iv) the Company's requiring that the Executive be based
anywhere other than the Company's principal executive offices in the
Vail, Colorado area, except for required travel on Company business to
an extent substantially consistent with his present business travel
obligations, or in the event that the Executive consents to any such
relocations, the failure by the Company to pay (or reimburse him for)
all reasonable moving expenses incurred by him; or
(v) the failure by the Company to continue in full force and
effect any benefit, retirement, savings or compensation plan or any
employee life, accident, disability, medical, dental, vision or other
employee welfare benefit plan in which the Executive is participating
at the time of a Change in Control of the Company, the taking of any
action by the Company which would adversely affect his participation in
or materially reduce his benefits under any of such plans or deprive
him of any material fringe benefit or perquisite (including but not
limited to the provision of an automobile and the payment of club dues)
enjoyed by him at the time of the Change in Control, or the failure by
the Company to provide him with the number of paid vacation days to
which he is then entitled in accordance with the normal vacation policy
in effect on the date hereof.
3. STOCK; DIVIDENDS; VOTING
3.1 The stock certificate(s) evidencing the Restricted Stock shall be
registered on the Company's books in the name of the Grantee as of the Grant
Date. Physical possession or custody of such stock certificates shall be
retained by the Company until such time as the shares or Restricted Stock are
vested in accordance with Section 2. While in its possession, the Company
reserves the right to place a legend on the stock certificate(s) restricting the
transferability of such certificates and referring to the terms and conditions
(including forfeiture) of this Agreement and the Plan.
3.2 During the period the Restricted Stock is not vested, the Grantee
shall be entitled to receive dividends and/or other distributions declared on
such Restricted Stock and Grantee shall be entitled to vote such Restricted
Stock.
3.3 In the event of a Change in Capitalization, the number and class of
shares or Restricted Stock or other securities that Grantee shall be entitled
to, and shall hold, pursuant to this Agreement shall be appropriately adjusted
or changed to reflect the Change in Capitalization, provided that any such
additional shares or Restricted Stock or additional or different shares or
securities shall remain subject to the restrictions in this Agreement.
3.4 The Grantee represents and warrants that he is acquiring the
Restricted Stock for investment purposes only, and not with a view to
distribution thereof. The Grantee is aware that the Restricted Stock may not be
registered under the federal or any state securities laws and that, in addition
to the other restrictions on the Restricted Stock, the shares will not be able
to be
3
<PAGE> 4
transferred unless an exemption from registration is available. By making this
award of Restricted Stock, the Company is not undertaking any obligation to
register the Restricted Stock under any federal or state securities laws.
4. NO RIGHT TO CONTINUED EMPLOYMENT
Nothing in this Agreement or the Plan shall be interpreted or construed
to confer upon the Grantee any right with respect to continuance of employment
by the Company or a subsidiary, nor shall this Agreement or the Plan interfere
in any way with the right of the Company or a Subsidiary to terminate the
Grantee's employment at any time, subject to Grantee's rights under this
Agreement.
5. TAXES AND WITHHOLDING
The Grantee shall be responsible for all federal, state and local
income taxes payable with respect to this award of Restricted Stock. The Grantee
shall have the right to make such elections under the Internal Revenue Code of
1986, as amended, as are available in connection with this award of Restricted
Stock, including a Section 83(b) election." The Company and Grantee agree to
report the value of the Restricted Stock in a consistent manner for federal
income tax purposes. The Company shall have the right to retain and withhold
from any payment of Restricted Stock the amount of taxes required by any
government to be withheld or otherwise deducted and paid with respect to such
payment. At its discretion, the Company may require Grantee to reimburse the
Company for any such taxes required to be withheld and may withhold any
distribution in whole or in part until the Company is so reimbursed. In lieu
thereof, the Company shall have the right to withhold from any other cash
amounts due to Grantee an amount equal to such taxes required to be withheld or
withhold and cancel (in whole or in part) a number of shares of Restricted Stock
having a market value not less than the amount of such taxes.
6. GRANTEE BOUND BY THE PLAN
The Grantee hereby acknowledges receipt of a copy of the Plan and
agrees to be bound by all the terms and provisions thereof.
7. MODIFICATION OF AGREEMENT
This Agreement may be modified, amended, suspended or terminated, and
any terms or conditions may be waived, but only by a written instrument executed
by the parties hereto.
8. SEVERABILITY
Should any provision of this Agreement be held by a court of competent
jurisdiction to be unenforceable or invalid for any reason, the remaining
provisions of this Agreement shall not be affected by such holding and shall
continue in full force in accordance with their terms.
4
<PAGE> 5
9. GOVERNING LAW
The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of Colorado without giving
effect to the conflicts of laws principles thereof.
10. SUCCESSORS IN INTEREST
This Agreement shall inure to the benefit of, and be binding upon, the
Company and its successors and assigns, and upon any person acquiring, whether
by merger, consolidation, reorganization, purchase of stock or assets, or
otherwise, all or substantially all of the Company's assets and business. This
Agreement shall inure to the benefit of the Grantee's legal representatives. All
obligations imposed upon the Grantee and all rights granted to the Company under
this Agreement shall be final, binding and conclusive upon the Grantee's heirs,
executors, administrators and successors.
11. RESOLUTION OF DISPUTES
Any dispute or disagreement which may arise under, or as a result of,
or in any way relate to the interpretation, construction or application of this
Agreement shall be determined by the Committee. Any determination made hereunder
shall be final, binding and conclusive on the Grantee and the Company for all
purposes.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
VAIL BANKS, INC.
By: /s/ E. B. Chester
---------------------------------------
/s/ Lisa M. Dillon
------------------------------------------
Name of Grantee: Lisa M. Dillon
5
<PAGE> 1
EXHIBIT 10.6
VAIL BANKS, INC.
AMENDED AND RESTATED STOCK INCENTIVE PLAN
RESTRICTED STOCK AWARD AGREEMENT
THIS AGREEMENT, made and entered into as of the 19th day of November,
1999, by and between VAIL BANKS, INC. ("the "Company") and E. B. CHESTER
("Grantee").
WITNESSETH THAT:
WHEREAS, the Company maintains the Vail Banks, Inc. Amended and
Restated Stock Incentive Plan (the "Plan"), and the Grantee has been selected
by the Committee to receive a Restricted Stock Award under the Plan;
NOW, THEREFORE, IT IS AGREED, by and between the Company and the
Grantee, as follows:
1. AWARD OF RESTRICTED STOCK
1.1 The Company hereby grants to the Grantee an award of 18,286 Shares
of restricted stock ("Restricted Stock"), subject to, and in accordance with,
the restrictions, terms and conditions set forth in this Agreement. The grant
date of this award of Restricted Stock is November 19, 1999 ("Grant Date").
1.2 This Agreement shall be construed in accordance and consistent
with, and subject to, the provisions of the Plan (the provisions of which are
incorporated herein by reference) and, except as otherwise expressly set forth
herein, the capitalized terms used in this Agreement shall have the same
definitions as set forth in the Plan.
2. RESTRICTIONS
2.1 Subject to Sections 2.2, 2.3, and 2.4 below, if the Grantee
remains employed by the Company, the Grantee shall become vested in the
Restricted Stock as follows: 10% of the Shares of Restricted Stock (rounded
down to the next whole share) shall vest on each anniversary (each such date
shall be a "Vesting Date") of the Grant Date, such that on November 19, 2009
("Final Vesting Date") all of the Shares of Restricted Stock shall be fully
vested. On each Vesting Date, Grantee shall own the Vested Shares of Restricted
Stock free and clear of all restrictions imposed by this Agreement (except
those imposed by Section 3.4 below). The Company shall deliver a certificate(s)
for the Vested Shares of Restricted Stock to Grantee as soon as practical after
each Vesting Date. For purposes of this Agreement, employment with any
<PAGE> 2
Subsidiary of the Company, or service as a Director of the Company or any
Subsidiary of the Company, shall be considered employment with the Company.
2.2 In the event, prior to the Final Vesting Date, (i) Grantee dies
while actively employed by the Company, (ii) Grantee has his employment
terminated by reason of Disability, (iii) Grantee's employment is terminated by
the Company other than for Cause (as defined in Section 2(e) of the Plan),or
(iv) Grantee terminates his employment for Good Reason (as defined in Section
2.5 below), the Restricted Stock shall become fully vested and nonforfeitable
as of the date of Grantee's death, Disability or termination of employment. The
Company shall deliver certificate(s) for the Restricted Stock, free and clear
of any restrictions imposed by this Agreement (except for Section 3.4) to
Grantee (or, in the event of death, his surviving spouse or, if none, to his
estate) as soon as practical after his date of death or termination for
Disability, termination without Cause, or termination for Good Reason. If
Grantee terminates his employment without Good Reason or if the Company
terminates Grantee for Cause, the Restricted Stock shall cease to vest further
and Grantee shall only be entitled to the Restricted Stock that is vested as of
his date of termination.
2.3 Notwithstanding the other provisions of this Agreement, in the
event of a Change in Control prior to Grantee's Final Vesting Date, the
Restricted Stock shall become fully vested and nonforfeitable as of the date of
the Change in Control. On the date of the Change in Control, the Company shall
deliver to Grantee a certificate(s) for the Restricted Stock, free and clear of
any restrictions imposed by this Agreement.
2.4 The Restricted Stock may not be sold, assigned, transferred,
pledged or otherwise encumbered prior to the date Grantee becomes vested in the
Restricted Stock.
2.5 For purposes of this Section 2, "Good Reason" shall mean
(i) the assignment to the Executive of any duties
inconsistent with his positions, duties, responsibilities and status
with the Company, its subsidiaries and affiliates immediately prior to
a Change in Control, or a change in his reporting responsibilities,
titles or offices which were in effect immediately prior to a Change
in Control, or any removal of him from or any failure to re-elect him
to any of such positions, except in connection with the termination of
his employment by the Company for Cause or as a result of his death or
Disability or termination by him other than for Good Reason;
(ii) a reduction by the Company in the Executive's base
salary as in effect on the date hereof or as the same may be increased
from time to time, or failure to give him annual salary increases
consistent with performance review ratings as compared with other
employees of the same or similar rank;
(iii) a failure by the Company to continue giving the
Executive bonuses comparable to the amount of bonuses given to him
prior to the Change in Control;
2
<PAGE> 3
(iv) the Company's requiring that the Executive be based
anywhere other than the Company's principal executive offices in the
Vail, Colorado area, except for required travel on Company business to
an extent substantially consistent with his present business travel
obligations, or in the event that the Executive consents to any such
relocations, the failure by the Company to pay (or reimburse him for)
all reasonable moving expenses incurred by him; or
(v) the failure by the Company to continue in full force and
effect any benefit, retirement, savings or compensation plan or any
employee life, accident, disability, medical, dental, vision or other
employee welfare benefit plan in which the Executive is participating
at the time of a Change in Control of the Company, the taking of any
action by the Company which would adversely affect his participation
in or materially reduce his benefits under any of such plans or
deprive him of any material fringe benefit or perquisite (including
but not limited to the provision of an automobile and the payment of
club dues) enjoyed by him at the time of the Change in Control, or the
failure by the Company to provide him with the number of paid vacation
days to which he is then entitled in accordance with the normal
vacation policy in effect on the date hereof.
3. STOCK; DIVIDENDS; VOTING
3.1 The stock certificate(s) evidencing the Restricted Stock shall be
registered on the Company's books in the name of the Grantee as of the Grant
Date. Physical possession or custody of such stock certificates shall be
retained by the Company until such time as the shares or Restricted Stock are
vested in accordance with Section 2. While in its possession, the Company
reserves the right to place a legend on the stock certificate(s) restricting
the transferability of such certificates and referring to the terms and
conditions (including forfeiture) of this Agreement and the Plan.
3.2 During the period the Restricted Stock is not vested, the Grantee
shall be entitled to receive dividends and/or other distributions declared on
such Restricted Stock and Grantee shall be entitled to vote such Restricted
Stock.
3.3 In the event of a Change in Capitalization, the number and class
of shares or Restricted Stock or other securities that Grantee shall be
entitled to, and shall hold, pursuant to this Agreement shall be appropriately
adjusted or changed to reflect the Change in Capitalization, provided that any
such additional shares or Restricted Stock or additional or different shares or
securities shall remain subject to the restrictions in this Agreement.
3.4 The Grantee represents and warrants that he is acquiring the
Restricted Stock for investment purposes only, and not with a view to
distribution thereof. The Grantee is aware that the Restricted Stock may not be
registered under the federal or any state securities laws and that, in addition
to the other restrictions on the Restricted Stock, the shares will not be able
to be
3
<PAGE> 4
transferred unless an exemption from registration is available. By making
this award of Restricted Stock, the Company is not undertaking any obligation
to register the Restricted Stock under any federal or state securities laws.
4. NO RIGHT TO CONTINUED EMPLOYMENT
Nothing in this Agreement or the Plan shall be interpreted or
construed to confer upon the Grantee any right with respect to continuance of
employment by the Company or a subsidiary, nor shall this Agreement or the Plan
interfere in any way with the right of the Company or a Subsidiary to terminate
the Grantee's employment at any time, subject to Grantee's rights under this
Agreement.
5. TAXES AND WITHHOLDING
The Grantee shall be responsible for all federal, state and local
income taxes payable with respect to this award of Restricted Stock. The
Grantee shall have the right to make such elections under the Internal Revenue
Code of 1986, as amended, as are available in connection with this award of
Restricted Stock, including a Section 83(b) election." The Company and Grantee
agree to report the value of the Restricted Stock in a consistent manner for
federal income tax purposes. The Company shall have the right to retain and
withhold from any payment of Restricted Stock the amount of taxes required by
any government to be withheld or otherwise deducted and paid with respect to
such payment. At its discretion, the Company may require Grantee to reimburse
the Company for any such taxes required to be withheld and may withhold any
distribution in whole or in part until the Company is so reimbursed. In lieu
thereof, the Company shall have the right to withhold from any other cash
amounts due to Grantee an amount equal to such taxes required to be withheld or
withhold and cancel (in whole or in part) a number of shares of Restricted
Stock having a market value not less than the amount of such taxes.
6. GRANTEE BOUND BY THE PLAN
The Grantee hereby acknowledges receipt of a copy of the Plan and
agrees to be bound by all the terms and provisions thereof.
7. MODIFICATION OF AGREEMENT
This Agreement may be modified, amended, suspended or terminated, and
any terms or conditions may be waived, but only by a written instrument
executed by the parties hereto.
8. SEVERABILITY
Should any provision of this Agreement be held by a court of competent
jurisdiction to be unenforceable or invalid for any reason, the remaining
provisions of this Agreement shall not be affected by such holding and shall
continue in full force in accordance with their terms.
4
<PAGE> 5
9. GOVERNING LAW
The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of Colorado without giving
effect to the conflicts of laws principles thereof.
10. SUCCESSORS IN INTEREST
This Agreement shall inure to the benefit of, and be binding upon, the
Company and its successors and assigns, and upon any person acquiring, whether
by merger, consolidation, reorganization, purchase of stock or assets, or
otherwise, all or substantially all of the Company's assets and business. This
Agreement shall inure to the benefit of the Grantee's legal representatives.
All obligations imposed upon the Grantee and all rights granted to the Company
under this Agreement shall be final, binding and conclusive upon the Grantee's
heirs, executors, administrators and successors.
11. RESOLUTION OF DISPUTES
Any dispute or disagreement which may arise under, or as a result of,
or in any way relate to the interpretation, construction or application of this
Agreement shall be determined by the Committee. Any determination made
hereunder shall be final, binding and conclusive on the Grantee and the Company
for all purposes.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
VAIL BANKS, INC.
By: /s/ Lisa M. Dillon
--------------------------------------
/s/ E.B. Chester
------------------------------------------
GRANTEE: E. B. Chester
5
<PAGE> 1
EXHIBIT 21.1
LIST OF SUBSIDIARIES OF VAIL BANKS, INC.
WestStar Bank
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0001035770
<NAME> VAIL BANK, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 29,935
<INT-BEARING-DEPOSITS> 36
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 31,446
<INVESTMENTS-CARRYING> 5,345
<INVESTMENTS-MARKET> 5,289
<LOANS> 336,735
<ALLOWANCE> 2,739
<TOTAL-ASSETS> 464,962
<DEPOSITS> 372,742
<SHORT-TERM> 30,060
<LIABILITIES-OTHER> 3,433
<LONG-TERM> 0
0
0
<COMMON> 6,069
<OTHER-SE> 52,658
<TOTAL-LIABILITIES-AND-EQUITY> 464,962
<INTEREST-LOAN> 32,076
<INTEREST-INVEST> 3,006
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 35,082
<INTEREST-DEPOSIT> 10,378
<INTEREST-EXPENSE> 10,868
<INTEREST-INCOME-NET> 24,214
<LOAN-LOSSES> 455
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 19,832
<INCOME-PRETAX> 7,897
<INCOME-PRE-EXTRAORDINARY> 4,856
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,856
<EPS-BASIC> 0.80
<EPS-DILUTED> 0.80
<YIELD-ACTUAL> 6.78
<LOANS-NON> 1,843
<LOANS-PAST> 11
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 3,882
<ALLOWANCE-OPEN> 2,590
<CHARGE-OFFS> 381
<RECOVERIES> 75
<ALLOWANCE-CLOSE> 2,739
<ALLOWANCE-DOMESTIC> 2,319
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 420
</TABLE>
